A Systematic Investment Plan or SIP as it is commonly referred to as one of the simplest ways to create potential long term wealth with mutual funds. However, sometimes even seasoned investors are unable to understand the true meaning of SIP and end up confusing it for a mutual fund scheme. SIP is one of the two ways in which you can invest in mutual funds (the other being lump sum investment).
Let us learn more about the Systematic Investment Plan and how much wealth you can create if you invest Rs. 10,000 every month for the next 20 years.
What is a Systematic Investment Plan?
As mentioned earlier, a Systematic Investment Plan is a convenient and hassle free way to invest small, fixed sums at periodic intervals in any mutual fund scheme of your choice. Those who have understood the power of SIP for long term wealth creation have already taken the SIP route with their mutual fund investments. SIPs come in different forms i.e., weekly, monthly, yearly, and biannually. But most young working professionals opt for the monthly SIP since this way they can save and invest a fixed portion from their monthly salary.
Which funds to start the SIP in?
Financial advisors recommend investors start a SIP in either hybrid funds or debt funds so that in case of an exigency they can easily liquidate their assets or completely withdraw from their investments. Having said that, one can start a SIP in any mutual fund scheme that they feel is ideal for their risk appetite, their investment time horizon, and for their ultimate financial goal. Also, when building a mutual fund portfolio, it is better to diversify your money across various asset classes. Do realize that it is not possible for all asset classes to perform in tandem all at once and hence, investing in various asset classes through mutual funds will not only mitigate the overall investment risk but allow the investor to get exposure to and favor various lucrative asset class markets.
The SIP calculation
Now if you want to know how much a monthly SIP of Rs 10000 can help you generate returns over the course of the next 20 years, you need to take the help of the online SIP calculator. For those who do not know, the SIP calculator is a free easy-to-use online tool that computes complex calculations and produces results in a jiffy.
So, to find how much corpus you can create with your SIP investments, enter the following details in the calculator:
- Monthly SIP sum – Rs 10000
- Investment horizon – 20 years
- Assumed rate of return – Let us assume 10% for this scenario
Based on the above inputs the SIP calculator can offer the following information –
- Total invested sum – Rs. 24 Lacs
- Total wealth created (sum invested + interest earned) – Rs. 75.94 Lacs
So, if you continue investing in a mutual fund scheme via SIP with a sum of Rs 10000 for 20 years, assuming 10% average returns you would have accumulated a total wealth of Rs 75.94 Lacs.
Before deriving any conclusions, investors must understand that the SIP calculator displays assumed returns. Also, while computing results the calculator does not take certain factors like the expense ratio or exit load into consideration.