Systematic Investment Plan (SIP) has become a popular investment option in recent times. With more people choosing to invest in mutual funds through SIP, it’s worth understanding why it’s favored by so many. How exactly does SIP work, and how can it turn small deposits into significant returns? Let’s break it down:
How Does SIP Work?
SIP operates similarly to a recurring investment. A fixed amount is automatically deducted from your account every month and invested in your chosen mutual fund. Since mutual funds are linked to the market, the invested money buys you a certain number of units of the mutual fund scheme. The number of units you get depends on the Net Asset Value (NAV) of the mutual fund on the day of your investment.
How Are Profits Made?
For example, if the NAV of a mutual fund is ₹20 and you invest ₹1000, you’ll receive 50 units. As the NAV of the mutual fund rises, the value of your units grows too. If the NAV increases to ₹35, the value of your 50 units rises from ₹1000 to ₹1750, generating a profit.
Rupee Cost Averaging: A Key Benefit
SIP offers the advantage of Rupee Cost Averaging. When the market is high, you buy fewer units, and when it dips, you buy more units for the same amount of money. Over time, this averages out the cost of investment, protecting you from market volatility.
The Power of Compounding
Another significant benefit of SIP is compounding. In SIP, you earn interest on both your principal and the interest earned. This accelerates your money’s growth over time. With average returns of around 12%, and sometimes higher, experts recommend sticking to SIP for the long term to maximize the benefits of compounding. However, keep in mind that SIP returns are market-dependent and not guaranteed.
Flexibility Makes SIP Attractive to Investors
SIP offers flexibility in both the investment period and amount, a feature not available in many other schemes. You can choose to invest monthly, quarterly, or half-yearly based on your preference. You can pause or resume your SIP, withdraw your money anytime, and even increase or decrease the investment amount as needed. You can also opt for a top-up to increase your SIP contribution over time.
By understanding how SIP works and its benefits, you can make informed decisions and potentially build significant wealth over time through small, regular investments.
