How Does SIP Work In Mutual Fund?

A Systematic Investment Plan allows you can put aside small sums on a regular basis to build up a sizable corpus in the future.You invest a fixed amount of money at regular intervals, which can be on a daily, monthly or quarterly basis. Your investments can be started with an amount as low as Rs. 500. On every instalment, you are allocated a certain number of units known as Net Asset Value (NAV) for the day based on the ongoing market rate. As the units are bought at different rates, you benefit from Rupee-Cost Averaging. Further, staying invested for a long duration gives you the benefit of power of compounding.

The Power Of Compounding

The rule of compounding is very simple— the sooner you invest, the more time your money gets time to grow. As Albert Einstein once said, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.’

Read more: 6 Things to know before investing in SIP

Let’s look at an example of how compounding works -

Suppose you started an SIP of Rs 1000 in a mutual fund at the age of 35 for a tenure of 15 years. With a modest return of 12% p.a., your money would grow to approximately Rs 5 lakh.

But, if you had started investing at the age of 25, your money would have grown to approx 19 lakh. This is how the power of compounding works.

Rupee-cost Averaging

Rupee-cost averaging works when you invest a fixed sum of money over regular intervals. It ensures that you buy more units when prices are low and less when the price is high. Investing at regular intervals helps to average out the overall cost of your investment. Thus, short-term pitfalls in the market don’t have a significant effect on your investments.

Some of the other benefits of this investment strategy are:

• Flexibility: You can discontinue your investments anytime. But, staying invested for a long duration is always a good idea.

• Discipline: You get into the habit of investing money regularly, and thus, inch closer to your financial goals. So, plan your goals and start investing through this plan today!

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