Understanding Systematic Investment Plans (SIP)
A Systematic Investment Plan (SIP) is a smart and hassle-free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at regular intervals (weekly, monthly, quarterly). This is a disciplined approach towards investing and helps build long-term wealth.
Key Benefits of SIP Investment
1) Disciplined Saving: Discipline is the key to successful investing. By committing to a monthly SIP, you ensure a portion of your income is consistently saved and invested before you spend it elsewhere.
2) Rupee Cost Averaging: Stock markets are volatile. When the market goes down, your SIP buy price goes down, and you buy more units. When markets go up, you buy fewer units. Over time, your cost per unit averages out, protecting you from market timing risks.
3) Power of Compounding: Compounding occurs when your investment returns start earning returns. The earlier you start investing through a SIP, the more time your money has to grow exponentially.
4) Extremely Affordable: You don't need a fortune to start. SIPs can be started with as little as ₹500 per month, making it accessible to students, salaried professionals, and business owners alike.
How does the SIP Calculator work?
The SIP calculator estimates your potential wealth based on three basic parameters:
- Monthly Investment Amount: The sum you decide to invest systematically every month.
- Period (Years): The number of years you plan to continue the investments.
- Expected Return Rate (%): The expected annualized rate of growth for the selected mutual fund portfolio.
The calculator uses the compound interest formula to determine the future value of all monthly contributions:
FV = P × [ ( (1 + i)n - 1 ) / i ] × (1 + i)
Where P is the monthly payment, i is the monthly rate of return (annual return rate / 12 / 100), and n is the total number of months (years × 12).