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How Mutual Fund SIPs Benefit from Power of Compounding Research Team | Posted On Tuesday, September 24,2019, 03:06 PM

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How Mutual Fund SIPs Benefit from Power of Compounding



If you are someone who wants to generate wealth and have the required patience to invest over the long term, then investing through an SIP mutual fund can help you to achieve your investment goal. A systematic investment plan is a right tool to hedge market volatility and benefit due to compounding over time. The concept of compounding allows you to generate wealth by earning interest on the interest income. Compounding works better for investors who decide to invest for long tenures.

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The Secret Ingredient of Wealth Creation Recipe:

The secret ingredient to wealth creation is time. Time is the most important factor when it comes to wealth creation. One common rule we as investors must know is that the returns turn out to be larger when the money is invested for a longer duration of time. Time is a much more important factor for SIP investments than other factors influencing the market like market levels, valuation (PE ratios), and current economic and political scenarios.

See Also: How To Invest In Mutual Fund SIPs Online?

Money Must Grow:

While you work to earn money, you can let your money do some work by investing it in a return-generating investmentoption.If you have a risk appetite then instead of letting your money sit idle in a savings account, you can invest it and earn from it. Money can do the hard work when it is invested in return generating financial instrument. Every rupee invested will make you more money in return. You can choose your investment options according to your risk appetite and let your money work to make more money. If you invest for a longer tenure, you will be able to create more wealth due to compounding. The longer you invest the more money you will be able to accumulate.

Systematic Investing:

Many a time people are not able to create wealth due to expenses like monthly EMIs, vehicle loan and other family liabilities. Most often, investors do not realize that investing a small amount over a longer tenure is enough to fetch them inflation-beating returns.

Let’s assume that you invest Rs. 5 lakhs at an annualized return of 12% yield.After 5 years, the money invested will give you an added income of Rs. 3.8 lakhs along with the principal amount. If you make the same investment over 20 years at a monthly instalment of Rs. 2080 it will yield you a profit of Rs. 24 lakhs.

You will wonder, is there such an investment option? Yes, SIP will help you to make a systematic investment. You don’t need to invest a large corpus to create wealth. You can make a substantial wealth by investing a part of your monthly savings in SIP. The SIP operates on the principle of compounding of interest and so the key to its success is making disciplined savings over a long tenure.

See Also: Are You Investing In SIPs For The Wrong Reasons

Mutual Fund SIP:

The mutual fund systematic investment plan has become popular among retail investors in India. It offers a convenient and disciplined way to create a good corpusover the long term. Investing in SIP is easy and they work much like recurring deposits. You have to make disciplined and regular savings just like an RD. But SIP carries a risk factor as they are subjected to market volatility and generate inflation-beating returns, unlike RD.

There are plenty of benefits that you can enjoy by investing in SIP. One main advantage is that you can make disciplined savings and investment at the same time with SIP. You can auto-debit your bank account that will automatically send money to your SIP account on a particular day of the month. You can invest in your favourite mutual fund scheme and get good returns until you decide to stop the scheme.

SIP is an excellent way to put your idle money to work. Instead of keeping money in a savings account you can invest your surplus funds in a SIP and let your money do some work.

The other key advantage of a SIP is that it helps average investors earn good returns. Even beginners can enter the market through a SIP. It carries lesser risk and allows the investor to earn by taking advantage of the market highs and lows. The SIPs work well in the volatile market, by averaging the investment cost and making the market timing irrelevant.

See Also: Mutual Fund SIPs Save You From EMI Trap

SIPs have generated excellent returns and created wealth for the investors over a long investment horizon.Like all other risky investments, the value of SIP investment may temporarily reduce for some time. But investing in SIP for long tenures will ensure you get better returns in future.

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