Benefits of starting an early SIP

Benefits of starting an early SIP


With financial planning, one can smartly save and invest to earn a better corpus and achieve their life’s short term and long term financial goals. When you invest according to your risk appetite, you are sure that you risk only money you can afford to lose. The investment market is flooded with a plethora of opportunities catering to the income needs of almost every individual. Investors who are completely risk averse; they generally settle with schemes that offer fixed interest rates. However, if you consider the interest rates that conservative schemes are offering these days, it is as low as 5 to 7 percent. 

One may not be able to achieve their life’s financial goals which such low interest rates. What mutual funds do is that they collect money from investors and invest this pool of funds to achieve a common investment objective. This is the primary reason why several investors are switching from conservative investment options like gold, FDs and PPFs to mutual fund schemes. Mutual funds do carry investment risk, but long term investing is known to reduce overall investment risk and optimize capital appreciation. Ideally, one must keep an investment horizon of 10 to 15 years to make sure that they are able to make the most out of the invested amount.

Start a SIP in mutual funds

A Systematic Investment Plan is an investment vehicle for investing small amounts at regular intervals. If you are a KYC complaint individual, you can start investing in mutual funds via SIP from the comfort of your home using a smartphone or a laptop and a decent internet connection. To determine how much money, you need to invest via SIP you can refer to SIP calculator, a free online tool accessible to everyone. If you allow auto-debit after completing all the pre-investment formalities, every month on a fixed date, a predetermined amount is debited from the investor’s savings account and electronically transferred to the fund. 

What are the benefits of starting an early SIP in mutual funds?

To achieve long term capital appreciation and become wealthy, one must start investing in mutual funds via SIP as early as possible. That’s because those who to continue to invest in mutual funds via SIP for the long run, such individuals are known to benefit from the power of compounding. In mutual fund terms, the word compounding refers to the multiplication of wealth in quantum with the higher interest rates which you earn. When the interest rate that you earned from the initial investment amount starts earning an interest of its own, that is referred to as compounding. Through compounding you might be able to turn your small monthly SIP investments into a large corpus. Also, if you start a SIP at an early stage in your life, will you get more years to invest and benefit from compounding. Thus, someone who starts a SIP at the age of 21, they are going to benefit from compounding more than those who start 10 years later.

Rupee cost averaging in another investment technique which SIP investors can benefit from over the long term. If the NAV of the mutual fund scheme is low, you are allotted more units. Similarly, if the NAV of the scheme is high but the SIP amount remains stagnant, lesser units will be allotted. This fluctuation of allotment of units in quantum with the changing NAV is referred to as rupee cost averaging. This way your investment risk is minimized, and you also get to take advantage from the falling markets.

It is possible to target your financial goals with SIP, but investors must first determine their risk appetite before investing.


David Lockhart