What is SIP?
A Systematic Investment Plan (SIP) is a method of investing in mutual funds where you contribute a fixed amount at regular intervals, such as monthly or quarterly. SIP allows you to build wealth gradually over time, leveraging the power of compounding, while reducing the impact of market volatility.
How SIP Works
Choose a Mutual Fund: Select a fund based on your financial goals, risk appetite, and investment horizon.
Decide Investment Amount: Decide how much money you want to invest at each interval. SIPs can start with as low as ₹500/month.
Set Investment Frequency: Most SIPs are monthly, but you can choose weekly, quarterly, or custom intervals.
Automatic Investment: The chosen amount is automatically debited from your bank account and invested in the selected mutual fund.
Long-Term Wealth Creation: Your money grows through market returns and the power of compounding.
Let’s assume:
- Monthly Investment: ₹5,000
- nvestment Period:20 years
- Expected Annual Return:15%
Where:
- P = Monthly investment (₹5,000)
- r = Monthly return (15% )
- n = Number of months (20 × 12 = 240)
Total Deposits:12,00,000
Total Maturity Amount:66,46027
Power of Compounding
Compounding is one of the most powerful tools for wealth creation. It allows your invested money to grow over time because the returns you earn are reinvested, generating even more returns. The longer you stay invested, the greater the growth.
Here’s an example of how your money can grow with compounding:
-
5 Years:
Invest ₹5,000 per month for 5 years, and your total investment of ₹3,00,000 can grow to around ₹4.37 Lakhs, creating a wealth gain of ₹1.21 Lakhs.
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10 Years:
Keep investing ₹5,000 per month, and your ₹6,00,000 investment may grow to approximately ₹13.17 Lakhs, creating wealth of ₹5.61 Lakhs.
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15 Years:
With the same investment habit, ₹9,00,000 can grow to about ₹30.86 Lakhs, giving you a gain of ₹16.22 Lakhs.
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20 Years:
Continue for 20 years, and your ₹12,00,000 investment can grow to nearly ₹66.46 Lakhs, building wealth of ₹38.93 Lakhs.