Mutual fund SIP is the best way to build wealth over the years and make a big corpus with a compounding impact.
SIPs (Systematic Investment Plans) in mutual funds enable investors to regularly invest a pre-determined amount of money. The most prevalent form of SIP is the monthly SIP, wherein a fixed sum is invested in the chosen mutual fund on a specified date each month.
While mutual fund SIPs can be profitable, it’s important to find the right fund and commit to long-term investing. Using a mutual fund calculator can help in choosing the best mutual fund and monitoring your investment progress over time.
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Compounding impact of SIP investments
Mutual fund compounding allows investors to earn interest on their invested funds and reinvest the returns, generating further interest over time. The compounding impact of SIP investments allows income generation not only from the initial investment but also from the subsequent interest earned.
Ramneek Ghotra, Chief Growth Officer, Finvasia, explains how the power of compounding in mutual fund SIP works and helps investors amass a huge corpus over time.
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Rs 1000 SIP can be turned into Rs 1.2 crore in 40 years
If you start investing Rs 1,000 at the age of 20, Rs 3,000 at the age of 30, and Rs 4,000 at the age of 40, you will retire a crorepati by the age of 60! This is the power of compounding and consistency, says Ghotra.
Let’s for example take this calculation, an SIP of Rs 1,000 per month in a mutual fund scheme with contributions for 40 years at an annualised return of 12% can take you to Rs 1.19 crore corpus. If this monthly SIP is increased by 10% every year, your corpus can be Rs 3.5 crore – this is the power of compounding.
If you invest Rs 3,000 in SIP and the duration is decreased to 30 years with same annualised return, the total corpus would be Rs 1.05 crore. If the SIP amount is increased by 10% every year, the corpus would be Rs 2.65 crore. In the last scenario, if you start your SIP at the age of 40 and make contribution for 20 years with annualised return on investment of 12%, you can build a corpus of Rs 40 lakh. If this contribution is hiked by 10% every year, this corpus would reach around Rs 80 lakh.
“Compounding refers to the process by which your investment earns returns not only on the initial principal amount but also on the accumulated interest from previous periods. In simpler terms, your money starts to work for you, generating returns upon returns, and thus accelerating the growth of your investment exponentially over time,” she elaborated.
By consistently investing and allowing your money to compound, you connect with this financial phenomenon and its potential of wealth accumulation over the long term, Ghotra added. “This also underscores the importance of starting early and maintaining consistency in your investment journey.”
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50/20/20/10 plan for investors
According to this plan, 50% of your income should be allocated to your regular expenditures, such as rent or mortgage payments, utilities, groceries, transportation costs, insurance premiums, and other recurring bills. By doing this, you ensure that your basic needs are met without overspending, explains Ghotra. She further said that 20% should be saved for leisure activities like shopping, holidays, and entertainment. Setting aside a portion of your income for leisure allows you to enjoy life and indulge in activities that bring you joy and fulfillment while still maintaining financial discipline.
Another 20% should be saved and invested for better returns to fulfil your bigger goals, like a new car or a new property. This way, you can build wealth over time and secure your financial future. The remaining 10% should be your emergency fund. So you never use your savings in case of emergencies.
According to her, the 50/20/20/10 rule will help you achieve a balanced approach to financial management. This strategy ensures that you meet your immediate needs, enjoy life, save for the future, and prepare for unexpected events, ultimately leading to greater financial stability and peace of mind.
Power-compounding money mixed with smart financial budgeting will make sure your wealth pools do not dry out due to splurges or unforeseen events, she concluded.
