How can small installments create a fund worth crores? Understand the magic of SIP in 5 points!

There are many people who cannot afford large investments. For such people, SIP is an excellent investment option, allowing them to build a substantial fund with small installments. That's why most experts recommend incorporating SIP into your portfolio. But how does this magic happen? Let's understand the magic of SIP in 5 points.

In today's world, everyone wants financial security and wealth creation. A common belief is that building a large fund requires a large investment. But Systematic Investment Plans (SIPs) have shattered this myth. Those who cannot afford large investments can create a fund worth crores by investing small amounts every month through SIPs. But how do SIPs achieve this magic? It's crucial to understand this. Let's understand it in 5 points here.

1. The Power of Compounding: Interest on investment, and interest on interest!

The biggest secret to the magic of SIPs lies in 'compounding,' which Albert Einstein called the eighth wonder of the world. This means that you earn a return on the money you invest, and the following year, you earn a return on your original investment as well as the previous year's return. Over time, this concept of 'interest on interest' makes your funds grow exponentially.

Example

Suppose you invest Rs. 5,000 every month in a SIP and earn an average annual return of 12%.
In the first year, your investment will be worth Rs. 60,000. Let's assume a 12% return.
In the second year, your investment will again be ₹60,000, but now you'll receive a total return of ₹1,20,000 (previous investment + new investment) plus the first year's returns.

Calculate:

If you invest ₹5,000 every month for 20 years (total investment ₹12 lakh), assuming an average SIP return of 12%, your total investment in 20 years will be ₹1,200,000. At 12%, you'll earn ₹33,99,287 in interest. Thus, in 20 years, you'll have a total corpus of ₹45,99,287, or ₹46 lakh.

If you continue this SIP for 30 years (total investment ₹18 lakh), your corpus will grow to approximately ₹1,54,04,866!

This is the magic of compounding, where the pace of money's growth accelerates over time.

2. Rupee Cost Averaging: Benefit from market fluctuations!

The market is always fluctuating. Another major advantage of SIP is that it gives you the benefit of rupee cost averaging. When you invest regularly through SIP, you buy fewer units when the market is high and more units when the market is low. This reduces the average cost of your investment over time, which helps you achieve better returns in the long term.

How does it work?

Suppose you decide to invest Rs 1,000 every month.

If the mutual fund's NAV (Net Asset Value) is Rs 10 in a given month, you will receive 100 units.

If the NAV falls to ₹8 the following month, your ₹1,000 will buy you 125 units.

If the NAV rises to ₹12 the following month, you will get 83.33 units.

By buying at different prices, your average cost per unit is reduced, and when the market rises again, you earn a higher profit. This reduces the risk of market timing, which is crucial for new investors.

3. Discipline and Regularity: Small Habits, Big Changes!

SIPs teach you discipline in investing. Every month, on a fixed date, a fixed amount is automatically deducted from your bank account and invested in mutual funds. This helps you develop a good habit of saving and investing, which is often crucial to achieving financial goals.

Why is discipline important?

We often think that we will invest when we have a large sum of money. But that "big money" never comes.
SIPs allow you to start with small amounts, as little as ₹500 per month.
This regular investment ensures that you don't deviate from your financial goals, no matter what small financial challenges life throws your way.

This habit helps you build a stable and growing portfolio over the long term, making it easier to achieve your financial goals.

4. Achieving Financial Goals: The Path to Realizing Your Dreams!

SIPs help you achieve all your financial goals, whether they're children's education, their marriage, buying your own home, retirement planning, or any other major expense. You can start and track separate SIPs for each goal.

SIPs for Different Goals

Children's Higher Education: You can make a monthly SIP of Rs 10,000 for 15 years, which can create a corpus of approximately Rs 50 lakh at a 12% return.

Retirement: If you start a SIP of Rs 15,000 per month at age 30 and continue until age 60 (30 years), you will have a corpus of approximately Rs 5.29 crore at a 12% return!
The beauty of SIPs is that they break down your larger financial goals into smaller, manageable monthly investments, making them more achievable.

5. Flexibility and Convenience: Start, extend, or stop whenever you want!

SIP is extremely flexible. You can start it at any time, according to your convenience. You can increase the SIP amount as your income increases (called a 'SIP top-up'), or if you face financial difficulties in a particular month, you can pause it temporarily (Pause) or stop it completely (Stop). There are no strict rules or penalties.

SIP top-up: This is a great feature. As your income increases, you can increase your SIP amount by 10-20% annually. This has a significant impact on compounding and helps your funds grow faster.

Online convenience: Nowadays, you can start an SIP online from the comfort of your home with just a few clicks, making the process extremely easy and convenient.

Frequently Asked Questions (FAQs)

Q1: How much can I start a SIP with?

A1: You can start a SIP with as little as ₹100, ₹500, or ₹1,000. Many mutual funds have a minimum SIP amount of ₹500 per month.

Q2: How much return can you expect from a SIP?

A2: Returns from a SIP depend on market performance and are not fixed. However, over long periods (such as 10 years or more), equity mutual funds have averaged annual returns of 10% to 15%.

Q3: Is it safe to invest in a SIP?

A3: SIPs are a way to invest in equity mutual funds, and equity investments involve market risk. However, rupee-cost averaging and long-term investing reduce risk. This gives your money a better chance of growing.

Q4: How can I start a SIP?

A4: You can start a SIP through a bank, broker, or directly through an asset management company (AMC). There are also many online platforms available today that allow you to easily start a SIP. You will need to complete the KYC (Know Your Customer) process.

Q5: Can I pause or stop a SIP?

A5: Yes, SIPs offer complete flexibility. You can pause or stop your SIP at any time as per your needs. There is no penalty. You can also restart it whenever you want.