what are the biggest advantages of mutual funds sip
TRANSCRIPT
What Are The Biggest Advantages Of Mutual Funds
SIP?
A Systematic Investment Plan is something that is highly
true to its name. It is an investment plan that systematically helps you build a
better future for yourself. When you sign up for a Mutual Fund SIP, you sign
up for a disciplined routine of investing a fixed sum of money, on a regular
basis, be it weekly, monthly, quarterly etc. A fixed amount, that can be as low
or high based on your feasibility, is automatically debited to your account and
is used to buy units from the market. Since it enables you to make fixed,
periodic investments in the mutual fund of your choice, it also alleviates you
from the burden of making huge payments. Let us understand some of the
bigger advantages of investing in Mutual Funds SIP.
1. RUPEE COST AVERAGING
One of the biggest fears of investing in the market is the fear of timing. Am I
investing at the right time? Am I going to lose my money? Should I wait longer
to see if the market will go up further? The apprehension never ceases. But
you can bid goodbye to this fear if you go the SIP way. Investing in SIP Mutual
Funds does not come with the nerve-wracking anticipation of investing money
in the market at the ‘right time’. Instead it makes your investment more secure
through Rupee Cost Averaging.
What is Rupee Cost Averaging? Let us say, you have invested Rs 1000 every
month in a scheme that is available at Rs 10 per unit value. Keeping these
figures in mind, you will be adding 100 units to your account in the first month.
However, if due to market fluctuation, the unit value depreciates to Rs 5, you
will be adding 200 units to your account with the allotted Rs 1000. So, in the
two months, the total value of your investments amounts to Rs 1500. But had
you invested the bulk amount of Rs 2000 in the first month itself, then your net
value would have dropped down to Rs 1000. In this manner, your Systematic
Investment Plan helps distribute your cost evenly, thereby reaping healthier
returns.
2. CAPITALIZING ON COMPOUNDING
Compound Interest is a fairly simply concept to understand. It is basically the
kind of interest you earn not only on the principle amount, but also on the
accumulated interest. In simple words – it is interest on interest. But what we
fail to understand is how not-simple its impact is on our investment planning.
When it comes to Mutual Funds SIP, let us say you started investing Rs 10,000
per year at the age of 30. So assuming the rate of return to be 9%
compounded, at the age of 60 you would have built a corpus of Rs 13.38L.
However if you choose to delay the investment process by five more years
i.e.,35, then your corpus will drastically reduce to Rs 8.56L. Though the
difference in the invested amounts is a mere Rs 50,000, the power of
compounding creates a huge gap in the built-up corpus.
So, the lesson is simple. When it comes to Systematic Investment Plans, the
earlier, the better!