A Systematic Investment Plan is something that is highly true to its name. It is an investment plan that systematically helps you build a better future for yourself. When you sign up for a Mutual Fund SIP, you sign up for a disciplined routine of investing a fixed sum of money, on a regular basis, be it weekly, monthly, quarterly etc. A fixed amount, that can be as low or high based on your feasibility, is automatically debited to your account and is used to buy units from the market. Since it enables you to make fixed, periodic investments in the mutual fund of your choice, it also alleviates you from the burden of making huge payments. Let us understand some of the bigger advantages of investing in Mutual Funds SIP.
RUPEE COST AVERAGING
One of the biggest fears of investing in the market is the fear of timing. Am I investing at the right time? Am I going to lose my money? Should I wait longer to see if the market will go up further? The apprehension never ceases. But you can bid goodbye to this fear if you go the SIP way. Investing in SIP Mutual Funds does not come with the nerve-wracking anticipation of investing money in the market at the ‘right time’. Instead, it makes your investment more secure through Rupee Cost Averaging.
What is Rupee Cost Averaging? Let us say, you have invested Rs 1000 every month in a scheme that is available at Rs 10 per unit value. Keeping these figures in mind, you will be adding 100 units to your account in the first month. However, if due to market fluctuation, the unit value depreciates to Rs 5, you will be adding 200 units to your account with the allotted Rs 1000. So, in the two months, the total value of your investments amounts to Rs 1500. But had you invested the bulk amount of Rs 2000 in the first month itself, then your net value would have dropped down to Rs 1000. In this manner, your Systematic Investment Plan helps distribute your cost evenly, thereby reaping healthier returns.
CAPITALIZING ON COMPOUNDING
Compound Interest is a fairly simple concept to understand. It is basically the kind of interest you earn not only on the principle amount but also on the accumulated interest. In simple words – it is interest on interest. But what we fail to understand is how not-simple its impact is in our investment planning.
When it comes to Mutual Funds SIP, let us say you started investing Rs 10,000 per year at the age of 30. So assuming the rate of return to be 9% compounded, at the age of 60 you would have built a corpus of Rs 13.38L. However, if you choose to delay the investment process by five more years i.e.,35, then your corpus will drastically reduce to Rs 8.56L. Though the difference in the invested amounts is a mere Rs 50,000, the power of compounding creates a huge gap in the built-up corpus.
So, the lesson is simple. When it comes to Systematic Investment Plans, the earlier, the better!