Mutual Fund SIP:Apart from the world of science, the great scientist Albert Einstein’s words are also remembered in the world of finance. In one of his statements, he had described compound interest i.e. compounding as the eighth wonder. His comment still proves to be true to a great extent for many investors. Einstein had said that if an investor invests little by little, then after a time he can have immense wealth. Investing in SIP option has proved to be true in many cases. Let us know what is SIP and how compounding affects it.
What is SIP?
SIP is an investment scheme in which small amounts can be invested. Mutual funds can be easily invested through this scheme. If someone’s monthly income is low, they can also invest in it. Investments can be made in this scheme on weekly, monthly, quarterly, half-yearly and yearly basis. SIP can be decided according to your income, through this SIP investors can make good savings.
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Follow this formula for investing in SIP
Suppose you start a job at the age of 20 with a monthly salary of Rs 10,000 and are living with your parents, thus avoiding the cost of house rent, which can save a significant amount especially if you live in a city. Mutual fund SIP gives the option to invest even with such a low salary. All you have to do is follow the 50:20:20:10 formula.
Using this formula, spend 50% of your salary on meeting daily needs, keep 20% for activities like shopping, entertainment, keep 20% aside for long-term goals like buying a new car or property and invest in savings schemes with high returns. The remaining 10% can be used to start a mutual fund SIP.
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You can become a millionaire by investing 1000 rupees every month
If you start your career at the age of 20 with a monthly salary of Rs 10,000 and invest 10 per cent of your income i.e. Rs 1,000 in a mutual fund SIP and get a return of 12 per cent, which is an average return based on the performance of mutual funds in the equity segment in the last decade, then you can become a crorepati by the age of retirement at the age of 60.
Monthly SI Investment : Rs 1000
Duration : 40 years
Estimated Annualized Returns: 12 percent
Total investment in 40 years: Rs 4,80,000 (Rs 4.8 lakh)
Value of SIP after 40 years: ₹1,18,82,420 (Rs 1.2 crore)
Your advantage: ₹1,14,02,420 (Rs 1.1 crore)
For example, if you invest Rs 1000 every month in a disciplined manner for 40 years while working, then your total investment amount during this period will be Rs 4,80,000. As per the estimated 12 percent return (compounded) on this amount, the value of SIP after 40 years will be Rs 1,18,82,420. That means there will be a profit of about Rs 1,14,02,420. This is the power of compounding. If you increase the SIP by 10 percent every year along with the salary increment, then in 40 years, through this regular investment, you can create a fund of Rs 3.5 crore by the age of retirement.
