A Systematic Investment Plan, popularly known as SIP, means a facility offered by mutual fund companies to investors. This type of investment promotes investing in a disciplined manner. This facility allows an investor to invest a fixed amount of money at intervals which are pre-defined in the selected mutual fund scheme. SIP intervals depend on the investor and these can be modified according to the investors’ choice. By taking this route to investments, an investor gets an opportunity to invest in a timely manner. Investors can invest without worrying about market dynamics and they can benefit over long-term because of rupee cost averaging and power of compounding.
SIP has been gaining popularity among Indian MF investors as it is very convenient. Investors are required to only give their bank some instructions to debit the amount every month (depending upon the period an investor selects).
Systematic investment plan is regarded as a highly safe way to make investments in the mutual fund. If investors decide to make a lump sum investment in a mutual fund, they might end up paying a very high price for the mutual fund scheme. This is because mutual funds depend on market conditions. Therefore, investment through SIPs can help the investors as they don’t have to time the market.
Power of Compounding in SIPs
When an investor regularly invests in a disciplined way through SIP for the long term, the benefits get magnified as a result of compounding effect. Compounding effect in SIP helps the investors earn returns not only on the principal amount (i.e., actual investment), but also on gains on the principal amount. It will be best to understand this with the help of an example. Consider that you invest your hard-earned money into a mutual fund scheme and you earn some income. Now, if you choose to reinvest this income, you will get income on the original investment, and the income that you have earned. If you keep reinvesting for the long-term, you earn returns on the investment and all its returns. Therefore, power of compounding gets clearly visible in SIP and it benefits over the long-term.
Here’s why a delay in SIP can be costly
Starting the process of investment late can be costly for one major reason. Late investors are not able to fully capitalize on compounding benefit. Compounding means reinvesting return one earns on invested amount. This can help investors to earn more income. In simple words, compounding strategy makes your money work for you.
One of biggest benefits which investors can applaud about compounding is value of time. With time, investors can gain returns, and yields on these returns can further generate returns.
Another reason for starting early is that investors tend to get more time to average out on their investments. Early investors will be in a much better position to benefit from market downfall in comparison to late investors. This is because whenever market corrects, early investors can increase their investment value and bring down their cost. This should eventually result in better returns.
It is true that if you wait to start your investment plans, that may have a significant impact on your results in the long run.
That is why it is being said that “Earlier you start and longer you stay invested, higher returns you get on investments.” Early investors have the power to unleash compounding benefit to the fullest.