From small to big: How SIPs can help you grow your wealth

A Systematic Investment Plan (SIP) is an affordable, disciplined way to grow wealth over time. It is an ideal tool for both beginner and seasoned investors as they can invest small amounts regularly in their chosen mutual funds. By investing consistently over the long term, their SIP contributions can help build significant wealth, allowing them to meet various financial goals.

How SIPs work

An SIP allows investors to invest a fixed amount in a mutual fund at regular intervals, the most common being monthly. As time passes, the investment compounds and generates returns on the accumulated growth. If investing via lumpsum, investors need to make a major initial investment, but SIPs let them start with modest amounts.

For example, say an investor starts a monthly SIP with INR 2,000 at a 12% annual rate for 20 years. At the end of the 20 years, the investor will have INR 10,00,000 through compounding. Investors can always plan their goals with an SIP calculator.

A step-up SIP lets them gradually increase their contribution every year, which might match their income growth. This flexibility aids investors to use the benefits of compounding more effectively, making mutual fund investments through SIP an efficient way to build wealth.

Advantages of SIPs

1. Flexibility:

SIPs allow investors to start investing in mutual funds with as little as INR 500. This facilitates their participation in the financial market and contributes to wealth growth. They can change their investment amount online anytime, allowing them to accumulate a substantial corpus at the end of their investment horizon.

The chosen amount is automatically deducted from the investor's bank account, removing the need for manual intervention. If in the future an unexpected expenditure arises, the flexibility of an SIP allows investors to temporarily pause their payments.

2. Discipline and consistency:

New investors often struggle with maintaining discipline while investing. An SIP is unique as it has regular, recurring investments, helping investors maintain financial discipline and consistency.

When investing in mutual funds via SIPs, a chosen amount is regularly deducted from the linked bank account on a determined date. This consistency helps investors to stick with the investment plan and achieve financial goals while allowing them to benefit from rupee-cost averaging.

3. Rupee-cost averaging:

Rupee-cost averaging is a concept where investors invest a fixed amount of capital in a specific investment despite the market conditions. In the long run, it averages out the cost of the investment, eliminating the need to time the market.

Assuming that the market is down, the Net Asset Value (NAV) of a mutual fund is low, allowing for the purchase of more units with the same amount of money. On the contrary, when the NAV is high, fewer units are bought for the same amount.

Over time, this averages out the total investment cost, eliminating the need to time the market. This is beneficial for investors, as timing the market is tricky, even for the most experienced investors.

Leveraging SIPs for wealth building

An investor can leverage an SIP with a few steps. The investor must select the right mutual fund, it should be a mutual fund that aligns with their financial goals and risk tolerance. If they are a first-time investor, they should start small with a manageable amount while gradually increasing it over time.

One must always keep track of their SIP’s performance to ensure it aligns with their goals. An investor should increase their contributions to their SIP gradually as their income grows. The step-up SIP can be an ideal choice for this purpose as it allows investors to maximise returns with increasing financial capacity.

Conclusion

SIPs are a reliable and disciplined approach to creating wealth over time. One can always start small, leveraging rupee-cost averaging and consistent contribution. An SIP investment in mutual funds has the potential to yield growth with minimal risk.

Whether an investor is new or experienced, an SIP is an accessible and flexible way to achieve financial goals. Consider taking the first step today because even small consistent contributions can lead to big rewards in the long term.

(Disclaimer: Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)