What is Power of Compounding in SIP for Mutual Funds


SIPs or Systematic Investment Plans are a highly beneficial way of investing in mutual funds. You need to invest a particular sum at regular intervals. Every instalment entitles you to a certain number of fund units, which depends on the net asset value (NAV) of the fund. Compounding benefits you when you thus invest regularly. When it’s time to check the returns, you can simply use the SIP return calculator to get accurate results.

What is the Concept of Compounding?

When you receive interest on your accrued interest, the underlying process is called compounding.

Say, you put a specific amount of money in a financial vehicle to get interest on it. Then owing to the effect of compounding, you’ll enjoy interest on the already earned interest after investing for some years.

This also happens in SIP investments.

How Do SIPs Benefit from Compounding?

Mutual funds are increasingly becoming a popular financial vehicle as they offer several benefits. Compounding, a fundamental aspect of the working of these funds and which helps generate high long-term returns is one of the benefits.

SIP investments are driven by the idea of taking advantage of the power of compounding through regular investments of small amounts into funds. Over a long duration, the invested sum grows considerably.

Say, you start investing ₹5,000 in an SIP plan at a 12% interest rate. You’ll earn ₹4,047 by the year’s end. Once it’s added to your primary principal of ₹60,000, the new principal amount will become ₹64,047. The process will repeat. Thus, you can earn ₹4,10,000 in 5 years, ₹11,60,000 in 10 years and so on.

You can keep checking the estimated returns using an SIP return calculator on the website of the asset management company.

Ways to Take Advantage of Compounding in Mutual Funds

You can boost the value of your SIP investments through the power of compounding by taking these steps:

  • Begin investing early: To generate exponential returns over time, try to start investing as early as possible. For instance, the day on which you get your first paycheck can be the time to begin this financial undertaking.
  • Invest regularly: The secret to strengthening your mutual fund portfolio is making regular investments. SIPs work on this principle only. Say, you earn around ₹10,000 monthly. Then consider setting aside ₹1,000 from your income every month to invest the same in your SIP plan. Over time, compounding will do wonders.
  • Keep patience: Not only should you start early but also stay invested for a long period to allow the returns to grow. So, avoid making hasty investment decisions that could be adverse to wealth accumulation. Keep using the SIP return calculator to get an idea of your expected returns. To achieve them, continue investing in a disciplined and focused way.

Now that you see the advantage of compounding in SIP investments, consider looking for the top mutual funds in India and start investing in them via SIP soon. You can effectively accumulate wealth with the help of consistent investments over years.

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