Sarah is a young computer professional, who wants to gain financial independence. She has big dreams - travel the world, own a cosy home, and save good money for her future. But with a fixed salary, saving a huge amount for these goals is impossible.
SIP is the tool to make Sarah’s impossible goals possible. With SIPs, Sarah can invest a fixed amount at regular intervals into her chosen mutual fund schemes.
In this article, we will explore whether investing in mutual funds through SIP is an effective strategy for wealth creation.
SIP and Wealth Creation
Here’s how SIPs can help with wealth creation:
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Compounding Interest
When a snowball rolls downhill, it starts small but then gathers momentum. It grows bigger with every turn. Compound interest in SIPs works similarly. When you invest your money in mutual funds through SIPs, your returns are reinvested, which gives you interest on the interest. Over a period, even small SIP contributions grow into a snowball - a significant corpus.
Benefit from Market Fluctuations
No one can guarantee success in the stock market. Even the experienced people face ups and downs. SIPs help you navigate this by employing rupee-cost averaging.
When the markets are down, the unit price i.e. the Net Asset Value(NAV) of the mutual fund also falls. When the NAV is low, you get more units, and when it’s high, you get fewer units. This way you can balance market ups and downs, ultimately lowering the overall cost of your investments.
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Make Wealth Creation a New Habit
SIPs are like a well-oiled machine which removes the stress of timing the market. You set it up once and then forget it, which ensures consistent investment regardless of your daily schedule. Whether you choose weekly, monthly, or quarterly contributions, SIPs make investing a seamless habit. This disciplined approach helps build wealth over time, leveraging the power of compounding and providing peace of mind by spreading your investment across various market conditions. With SIPs, you can achieve your financial goals without constant market monitoring.
Ability to Start Early
The power of compounding is in time. If you want to get the most advantage of SIP, you should start early and stick with it.
For example, if Person A starts investing Rs 5000 per month for 20 years, he will go on to accumulate a higher amount than Person B who invested Rs.10,000 for 10 years. In this case, both A and B invested Rs 12 lakhs in their investment period at a 12% average rate of return.
However, Person A would accumulate around Rs 50 lakhs while Person B would accumulate Rs 23.23 lakhs.
That’s the power of SIP and starting early.
Utilise Different Facilities Associated with SIPs
While SIPs are generally associated with a fixed sum of investment, SIPs can be quite flexible as well. The SIP amount can be increased. Step Up/Top Up SIP allows investors to increase their SIP amount by a certain fixed percentage or a fixed amount, periodically. As a result, the wealth creation process speeds up.
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Thus, SIPs are a powerful tool for building wealth brick by brick. With discipline, patience, and a long-term perspective, you too can be like Sarah, SIPing your way to financial freedom.
Before investing in mutual funds, it is advisable to consult your mutual fund advisor.
Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature