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The A-Z of SIP and the Power of Compounding

Leading a steady life with all the comfort in the world is everyone’s dream. The ideal way to live that dream is by preparing a strong financial portfolio. One noteworthy way to do so is by investing.

Investments allow you to grow your financial worth. There are many financial instruments in the market, like bonds, mutual funds, and FDs, with a lump sum or SIP mode. For hassle-free investments, you should opt for SIP investment. You can visit the chosen bank’s website and use a SIP calculator to plan your investment.

Read below a detailed account of SIP investment to get a better understanding.

Why Should You Invest in SIP?

Let’s assume that you have a rented house and a young daughter. Your primarily financial goal will be to buy the house and get your daughter married. You do invest in bonds. But when you project your future, your savings might not be enough to meet the expenses, and you might fall short of achieving your goals. It can be due to the bitter fact that the inflation will grow faster than the returns, eventually dwarfing your savings at the end. You could have earned higher returns if you didn’t invest in bonds but other equity investments.

You can opt for investing in mutual funds via the SIP route to fulfill your financial goals.

How to Get Started with SIP Investment?

Before you invest in SIP, it is essential that you are prepared. You should follow these steps:

  1. Set your financial goals. Make sure that they are specific and attainable.
  2. Start with a timeline. You can begin by deciding when you need the money. It will be your investment tenure.
  3. Decide how much money you need and how much you can invest. You can use the SIP calculator and figure out the amount you require to accomplish your financial goals.
  4. Consult a financial advisor, go for a plan that meets your requirements, use the SIP calculator, and then choose.
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At this point, you are ready to invest money. You can pay the money by post-dated cheques or through an electronic clearing service. When you opt for ECS, you give your bank a standing instruction to auto-debit the investment amount from your account every month. This sum that you invest every month in the chosen SIP is invested through a mutual fund. You can track your portfolio by logging on to the selected company’s website.

How Does SIP Work- Power of Compounding?

In SIP investment, money experts handle your money, and thus, you do not have to worry. One of the underlying mechanisms behind the working of SIP is compounding.

The Power of Compounding

Unlike simple interest, compounding involves making the interest earned a part of your base capital. The subsequent interest is calculated based on this newly increased capital. Hence, compound interest leads to an exponential growth of your money. Note that the effect of compounding increases as the investment tenure increases.

Look at the table below to understand the power of compounding:

 

SIP Investment

Tenure

Rate of Interest

Returns at the end of the tenure

Total Output

Simple Interest

Rs 100

5 years

10%

Rs 50

Rs 150

Compound Interest

Rs 100

5 years

10%

Rs 61

Rs 161

 

According to the table, you will see a 7% rise in the total output when the interest is calculated on a compounding basis. This seemingly small difference becomes staggering as the period of investment lengthens.

Benefits of SIP Investments

  • SIP investments offer flexible and affordable investment options. You can start with smaller amounts and increase the sum of investment as and when your earning grows.
  • When you opt for SIP investments, you will not have to bear any entry or exit charges. If you want to withdraw in the future, you can do so without incurring a penalty. And for better financial planning, you can use the SIP calculator and plan accordingly.
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Start investing in SIP to achieve your financial goals. You can opt for reputable brands like Axis Bank for such investments. Visit the website, use their SIP calculator, and set up your investment plan. They offer mutual fund schemes from various asset management companies for you to choose from.

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