Are you grinding yourself in the 9 to 5 jobs and are yet unable to create wealth? Most of us think wealth can be created by putting money in a savings account at the end of the month. But this money will not suffice for long and will evaporate if health emergency strikes your family or you have to make a down payment for purchasing home. So, to become rich, you must start investing a portion of your savings in the investment options like SIPs.
Let’s try to understand how you can invest in SIPs and how it will help you to get greater returns on investment?
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Investing in SIP can prove to be one of the best ways to grow your money as it works on the principle of compounding. While you may be busy working, your fund manager manages your money and lets it amplify. Instead of investing your money in low return investment schemes like FD or letting it sit idle, you can invest your money in mid-risk SIPs and let your money do some work.
So, first you should calculate your necessary expenses and set aside an amount from your monthly savings for investment in SIP. Some of the best tips to invest in SIP are given below:
The systematic investment plan popularly known as SIP allows you to invest a fixed amount over regularly in your favourite mutual fund scheme. SIP is a hassle-free and convenient way of investing in mutual fund schemes.
When you invest in a SIP then the investment amount is auto-debited from your bank account on stipulated intervals and is invested in your preferred mutual fund according to the NAV. Based on the NAV you will be assigned a certain number of units each time you invest. You can choose to invest in the best SIP plans and each time you invest a certain number of units gets added to your account at the current market rate. The investor can choose to invest on a monthly or quarterly basis.
SIP is the smartest and the most convenient way of investing your money and growing it. Investing in SIP mutual funds is flexible and you can choose to invest a pre-defined sum of money on a monthly, quarterly basis.
The SIP Mutual funds are designed specifically to grow your money time by harnessing the power of compounding. There are several benefits of investing your money in SIP. It encourages you to start investing and induces a habit of investing money in financial instruments. But the question remains as to why SIP is considered to be the superior form of investment in mutual funds? Let’s try to understand why SIPs are so good at giving higher returns:
The SIP allows you to invest a fixed amount of money regularly despite the NAV or market levels. The money is invested in a mutual fund portfolio and the investor ends up getting more units of mutual funds when the markets are low. Suppose as an investor you are investing Rs. 8000 per month. When the NAV is 20 you will be able to purchase 8000/20 = 400 units. However, if the market dips and the NAV becomes 15 it will allow you to purchase 8000/16 = 500 units. You have purchased more units when the market is lower. As an investor, you can gain by purchasing more units when the market dips and selling them the purchase price when the market is up or you can make gains when the value of each unit goes up.
If you make investments for a long time, the benefit of compounding helps you amplify your returns on your investment. The amount invested in SIP earns interest. The interest and the amount invested get accumulated over a period of time. The longer the tenure the higher the value of the funds will be. So, if you keep investing for a longer time you can earn better returns. The returns in SIP are better than traditional investment options like FDs that also use the power of compounding to generate returns. This is because FDs will give you returns at 7% to 8% over 5 years whereas a SIP mutual fund will give your returns at the rate of 10% to 15% for the same tenure.
Let’s assume Yogesh wants to invest a sum of money and has chosen the XYZ mutual fund scheme. Investing in SIP mutual fund scheme gives him the option of investing Rs. 1000 per month for 35 years and earns an average return of 15% on his investments. SIP will enable Yogesh to grow the money over the invested period at expected returns of 15%. For a period of 35 years he has invested Rs. 4.2 lakh while the SIP will give him return 3 times higher than the invested amount. On maturity, Yogesh’s total gains from SIP will be over 1.44 crore.
There are two methods that helped Yogesh get such returns. This is due to the compounding of the investment as well as the rupee cost averaging. With rupee cost averaging the Yogesh was able to purchase additional units when the prices were low and due to compounding, he was able to earn interest on the invested amount.
So, a responsible and dedicated investment towards your SIP can make you richer than ever before.
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