Mutual fund investments have become one of the most popular investment choices amongst investors in the country and a Systematic Investment Plan (SIP) is one of the go-to ways of investing in equity funds. There are several reasons why SIP investments are popular beginning with the fact that they allow investors to access the stock market with as little as Rs. 500 per month. SIP mutual funds are a low-cost way of building a corpus over the long term that also inculcates the habit of saving. There are several other benefits of an SIP investment that make it a powerful tool for wealth creation. Here are some of them:
- Inflation beating returns
Over time, the purchasing power or value of your money reduces. What you could buy with Rs 500 seven years ago will take more money to be bought right now. This is essentially inflation. One way to store the value of your money over time is by making investments such as equity mutual funds that offer inflation beating returns. For instance, if the rate of return on your SIP investment in an equity fund is 12% while the rate of inflation in the economy is 6%, your returns exceed the rate of inflation and hence beat it.
- Rupee cost averaging
One of the major advantages that SIP mutual fund investments have over lumpsum investments is that there is no need to time the market. SIP investments make use of the concept of rupee cost averaging where you invest a fixed amount of money regularly over a period irrespective of the market price of the investment. When the market price of the mutual fund units is high, fewer units are bought and when the price is low, more units are purchased. This way short-term market volatility is neutralised.
- Compound interest
SIP investments are an effective tool for wealth creation in the long term because of the power of compound interest. Compound interest helps you earn more money by earning interest on interest and increasing your corpus in this continuous process. For instance, you start a monthly SIP investment in an equity mutual fund of Rs. 10,000 at an estimated rate of return of 10%. At the end of the first year, your returns would be about Rs 6,703. This Rs 6,703 would be added to the Rs 1,20,000 you have invested in the first year and you will earn returns on the total amount of Rs 1,26,703 in the second year. This compounding process will continue as your monthly SIPs continue and at the end of 10 years, your mutual fund corpus would be around Rs 20 lakh.
Equity fund SIP investments are a must have in your portfolio for the range of benefits they offer. From inflation beating returns to rupee cost averaging, SIP investments can help you meet your financial goals seamlessly. You can use an SIP calculator to figure out what the monthly SIP amount should be to meet your goals in the desired timeline.