An investment in mutual funds is undertaken with one aim. The said aim is to accumulate enough wealth in the long term. The long-term wealth acquired through mutual fund investments is useful for day-to-day expenditures after retirement.
In a mutual fund scheme, an asset management company or AMC collects money from a group of investors. After pooling enough money, the AMC then uses it to invest in financial securities such as gold and stocks. Thanks to the several benefits associated with them, mutual fund schemes are considered a prudent investment choice. There are two investment modes when it comes to fund allocation in mutual funds. Those two options are lump-sum investments and systematic investment plans (SIPs). Under lump-sum investments, you need to make a one-time payment for the investment mutual fund scheme. SIP, on the other hand, works differently.
What are systematic investment plans?
As stated above, from the perspective of nature and function, a systematic investment plan or SIP is different from the lump-sum mode of investment. Through this investment mode, a fixed amount is deducted from your bank account on regular basis (monthly deductions being the most common example). Under this mode of mutual fund investment, the pressure of arranging money does not fall on you. Furthermore, systematic investment plans don’t end up burning a hole in your wallet.
How do SIPs work?
With systematic investment plans, to pay for the mutual fund scheme you can leave a standing instruction with the bank that could enable automatic deductions at regular intervals specified by you. So, even if you ever forgot the payment date, this feature ensures that the payment for mutual fund investment goes through smoothly.
What are the benefits of SIPs?
The advantages of SIPs are:
- SIPs are affordable:
In firm contrast to lump-sum investments, an investment mode in which you are required to make a payment at once, with systematic investment plans, you can opt to make regular payments. Also, under SIPs, you can start at a very low investment amount and increase it as your financial situation improves, Making these plans light on the wallet.
- They are convenient to use:
A major advantage of systematic investment plans is that these plans are very easy to both understand and use. Also, these plans are known for not coming up with numerous terms and conditions. Also, it is very easy to register for SIP online, a process which is fast and hassle-free. Generally, the validation of a SIP application takes approximately three weeks. Once validation is completed, you get free access to your mutual fund portfolio. Investors who are new to investing in mutual funds may also opt to go ahead with SIPs because you could pay for them at regular intervals. All that’s required on your part is to choose one of the many different mutual fund variants. After doing that, you can leave a standing instruction with the bank for an auto-debit.
- These plans are suitable for conservative investors:
If you are someone who aims to accumulate higher returns in the long term but wants to avoid the risks associated with the market, sign up for a systematic investment plan. All that’s required of you is to pay small amounts at regular intervals. Thus, if you have opted for SIPs, you don’t need to worry about the budget. You need to do one thing before signing up for a systematic investment plan. It is to determine your monthly investments. For that, it is possible for you to use the SIP calculator.
How much would one accumulate if they were to invest ₹ 20,000 per month?
As stated earlier, to calculate the total accumulation after investing ₹20,000 every month, you could use the SIP calculator. The final value is dependent on the number of years you keep on investing and the interest offered. Let’s assume that the interest is 12% per annum. Now let’s look at the revenue that might be generated by investing in the mutual fund scheme through the SIP:
|Number of years||The value of returns generated|
|5 years||₹12 lakh|
|10 years||₹24 lakh|
|15 years||₹36 lakh|
|20 years||₹48 lakh|
|25 years||₹60 lakh|
|30 years||₹72 lakh|