How does Mutual Fund SIP work?

best mutual funds for sip

Mutual funds are one of the most popular forms of investments nowadays, especially with the increasingly affluent middle class. SIP (Systematic Investment Plan) has proven to be a classic investment model, where the investor can keep investing a small amount on a regular basis (a month, half-yearly, or annually) to create wealth based on his/ her risk appetite.

Benefits of SIP

SIP makes an investment a lot easier than what actually it used to be. Generally, the money is invested on a monthly basis. SIP has made an investment into mutual funds plan very easy for those investors who are not willing to go beyond Rs. 3000- Rs. 6000 monthly.

The investors are befitted a lot by best mutual funds for sip because it is a very easy investment opportunity. Through SIP, retail investors can easily be involved in a stock market without taking on the huge risks associated with stocks and equities. There are many schemes with varying degree of debt:equity ratio. You can buy units based on their NAV and thus start accumulating wealth for your long term financial goals.

How does it work?

An SIP works on the simple premise of small yet continuous investments made into a mutual fund scheme. Based on your SIP amount, you are allocated a few units of the scheme at a market rate (also known as NAV or Net Asset Value). This NAV keeps changing every single day as per the market performances of the different companies that make up the mutual fund scheme.

How the customer benefits?

When you keep adding to the fund through periodic investment, you benefit from the power of compounding and from Rupee Cost Averaging.

Rupee Cost Averaging simply denotes that your fund will be allocated more units when the price is low and lesser number of units when the price is high. This way you need not feel the heat when looking to ‘time’ the market to enter into the SIP at low. With SIP, during a volatile period you can get higher units on average.

Power of compounding is another great benefit when you keep investing dedicatedly for over 20+ years. To take a small example:

  • Sam started investing at 40 years of age @ Rs. 10000 p.m.
  • At 60 years and at 7%, his cost would be 24 lakhs and returns would be 52.4 lakhs
  • Paul started investing at 30 years of age @ Rs. 10000 p.m.
  • At 60 years and at 7%, his cost would be 36 lakhs and returns would be 1.22 crore!

That’s the power of compounding. If you begin early, you get better returns from your mutual funds SIP. In the above case, starting just 10 years earlier than Sam, Paul was able to get more than double Sam’s returns by the time they reached 60 years of age.

SIP has proven to be a great financial vehicle to build wealth with small yet committed investments.


Related posts

Leave a Comment