If you wish to inculcate the discipline of regular investing, then the best way to do so is by starting a monthly SIP any mutual fund scheme of your choice. A Systematic Investment Plan is a simple and effective way to build a long-term corpus by investing small, fixed sums regularly. The two biggest advantages of starting a SIP in mutual funds are that investors can benefit from the power of compounding and rupee cost averaging.
Rupee cost averaging
Rupee cost averaging is nothing but averaging out the cost of purchase of mutual fund units, thus maximizing profits whilst minimizing the investment cost. A Systematic Investment Plan has the power to leverage market upheavals. When there is an incline in the NAV (net asset value) of the mutual fund, the monthly SIP sum buys fewer units. Similarly, whenever the NAV witness a dip, with the same sum an investor is able to buy more units. For example, if the NAV of the fund is 20, and you start a SIP of Rs. 5000 in the mutual fund, you can buy 250 units. In the next month if the NAV rises to 30 you will buy 150 units. In the next month, if the NAV dips to 25, your SIP sum will be able to buy 200 units. Since equity markets constantly witness fluctuations, the chances of you buying more units with the same SIP are high. This way you are buying more units and in the long run, your capital gains can be much more than your total investment sum.
Power of compounding
In mutual funds, the power of compounding is a term applied when the investor not only earns interest on their principal investment sum but when this interest is added to the principal sum and starts generating interest of its own.
Importance of SIP calculator before starting SIP in mutual funds
Earlier we covered what SIP is and how investors can leverage the power of compounding and rupee cost averaging if they continue to invest for the long run. Now we will discuss the SIP calculator and why investors must use this tool before starting their SIP journey.
A SIP calculator is a free tool easily available online. Investors can use this tool to calculate the future returns that they will earn through periodic SIP investments. However, the actual returns may vary from the actual returns generated as the SIP calculator doesn’t take factors like expense ratio or exit load while computing.
Having said that, a SIP calculator is a time saving tool as it computes data and provides results in just a few seconds. If an average human had to do the same task, this might take a lot of time.
Here’s a simple example emphasizing the importance of an SIP calculator in planning mutual fund SIP investments:
Assume that you want to buy a plot for building a bungalow by the countryside for which you to make a down payment of Rs. 3 lakhs. You have to make the down payment in the next year. You do not have the sum right now but can invest every month so that by the end of the year you have the required corpus.
If you plan to build this corpus through mutual funds, you can use the SIP calculator. All you need to do is input a few details like:
- Total corpus needed – Rs 300000
- Investment horizon – 12 months
- Assumed returns – 8%
Within a few seconds, the SIP calculator will calculate the following –
- Monthly SIP needed – Rs 24000
- Estimated returns – Rs. 19424
- The total value of your investment – Rs. 307424
Since you earned more than Rs 19000 in interest, you will be paying that much sum less from your pocket while making the down payment of the bungalow plot. Without the use of the SIP calculator, making these calculations might not have been possible.
