Systematic steps for a great future

The journey of a thousand miles begins with a single step. In the same vein, the creation of a corpus of Rs 1 crore begins with a single investment. One crore is a large number. But when you have time on your hands and you invest regularly, you can surely achieve this goal. Let’s find out how you can pave the way for a great future one step at a time.

What is SIP?

Systematic Investment Plan (SIP) is an investment vehicle where you can invest a specific amount of money in mutual funds on a periodic basis. It can be on a monthly, quarterly or even annual basis. This is a disciplined investment approach to help you realise your financial goals in the future.

How does SIP work?

Imagine you invest Rs 1,000 in a mutual fund each month. This amount is used to buy a particular number of units of the fund scheme. When the market is volatile and the fund prices are low, you can buy a larger number of units. And when the fund price increases, you buy lesser number of units. This is known as Rupee Cost Averaging and helps you minimize your overall costs in the long term.

When can you start investing?

You can begin an SIP in an open-ended mutual fund any time you want. You just need to complete the application form and submit it to the fund house. These days, it is possible to finish the process online.

Once you start investing, many fund houses require you to invest for at least six months in the SIP. But as an investor, you can choose any tenure you wish including the perpetual option. Here, you would continue to invest in the SIP forever until you give specific instructions to the fund house to close it.

Advantages of investing through SIP

  1. You can start with small amounts

You don’t need to have huge savings to invest in mutual funds. Through SIPs, you can start your investment journey with a minimum of Rs 500 per month. This makes SIPs a very pocket-friendly investment avenue.

  1. Power of compounding

Compounding means that the interest you earn on your investment starts earning interest itself. For instance, if you invest Rs 10,000 in a mutual fund (at 10% interest rate per annum), you earn an interest of Rs 1,000 at the end of the year. If this interest is reinvested into the fund, you start earning returns on the additional amount. Over a period of time, this can snowball into a large corpus of money.

Here, you can practically see how it is possible to earn Rs 1 crore by investing in SIPs.

Consider a situation where you invest Rs 5,000 in a mutual fund that offers annual returns of 12%. If you invest in this fund for 20 years, you would achieve a corpus of Rs 50 lakh. Invest for just five years more and your corpus increases to Rs 95 lakh. Now, continue investing for five years more and you would create a giant fund of Rs 1.8 crore. This is the power of compounding.

  1. Ideal for financial planning

You may have different financial goals you wish to fulfil. These can be short term goals like planning a trip to Wimbledon with your college friends or long term goals like starting your own business in ten years time. By investing steadily through SIPs in different investment avenues, you can fulfil your goals at the right time. But for that, you need to regularly invest in the funds without fail.

  1. Easy to invest

Unlike many other investment avenues, SIP offers you a lot of investment flexibility. For example, imagine your salary has increased and you wish to invest a larger amount of money in the fund. Fund houses like Franklin Templeton allow you to alter your SIP investments without any hassle. Further, you also have the option to pause your SIP investments in case of emergencies or invest forever through perpetual SIPs. These options make SIP investments very flexible.

Conclusion

The future is unknown but that does not mean you cannot influence it. Through periodic investments in SIPs, you can lay the foundation of a great future one deposit at a time.

Author: Kar

Dr. Kar is in the Information Systems & Management area in one of the top QS Ranked universities of Asia/world. He has extensive experience in teaching, training, consultancy and research in Indian Institutes. He has published over 100 high impact research papers. He has hundreds of citations as per Google Scholar. He has also authored/edited 4 books. He is the Editor and Founder of Business Fundas. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.