SIP stands for Systematic Investment Plan and it is a systematic way of investing into mutual funds. You can invest in SIP by contributing small amounts every month and build up a substantial corpus in the long run.
However, invest in SIP early in your life (when you get your first salary) as that is the key to create maximum wealth at the earliest. But do you know why?
The power of compounding
SIP investments in mutual funds earn compound returns. Compound returns pays returns on the returns already earned by you. Any return you earn is added to the investment amount. Subsequent returns are then calculated on the aggregate amount. For instance, if you invest Rs.10,000 and earn 10% return in the first year, your return will be Rs.1,000. The total amount would become Rs. (10,000+1000) = Rs.11,000. For the second year’s return computation, returns would be on Rs 11,000 and so on. This is how compound interest works in a very simple form in mutual fund investment or SIP. Compounding returns works best if you give it more and more time. That is why SIP investments in mutual funds should be started early so that you can hold them for longer tenures and earn attractive returns.
Use a SIP calculator
There are SIP calculators which lets you know the corpus which you can accumulate after a specified tenure. The calculator requires three major inputs –
- The monthly SIP investment amount
- The assumed rate of return
- The SIP tenure
When you provide these details, you get to know the corpus at the end of your SIP tenure. SIP calculator also lets you find out the cost of delay in starting SIPs. Let’s see how –
Let us take the instance of Sandip and Randip. Both are aged 30 years. Both require a good corpus at age 60. Sandip starts SIP in mutual fund schemes of his choice immediately on turning 30 while Randip waits out a year in finalizing his decision. Let us see how their investments fare –
|Sandip Portfolio||Randip Portfolio|
|Age of starting SIP – 30 years||Age of starting SIP – 31 years|
|Monthly SIP Amount – Rs.5000||Monthly SIP Amount – Rs.5000|
|Expected annual rate of return – 12%||Expected annual rate of return – 12%|
|Tenure – 30 years||Tenure – 29 years|
|Corpus accumulated at 60 years – Rs.1.76 Crores (rounded off to nearest lakh)||Corpus accumulated at 60 years – Rs.1.56 Crores (rounded off to nearest lakh)|
Randip fell short of Rs 20 Lakhs as he delayed his mutual fund SIP investment by a year! This is the cost of delay
A SIP calculator helps calculate the estimated corpus from SIP in mutual fund schemes. It also doubles up as a calculator to show you the cost of delaying your mutual fund SIP investments. Use SIP calculator to find out how much can you accumulate by starting a SIP early. If you have a procrastinating attitude and are delaying your SIP investments, wake up please!