The Magic Of Compounding With Mutual Fund SIPs

There are two ways to invest in a mutual fund. Either you can invest a lump sum amount of money, or you can invest a fixed amount every month in a systematic manner. Both these options may work for different goals. For instance, the former needs you to have a corpus ready. Hence, it is a great method if you have a corpus ready and want to earn some profit from it regularly. But if you want to create a corpus, SIPs are the options you could choose. SIP is the more popular option here, especially since it gives you the option to start small. Another factor that works in favour of SIPs is the power of compounding. It can help your money achieve substantial growth over some time. Let us learn more about compounding and see how it can help your SIP investments.

What is compounding?
Compounding is a method where the interest earned is invested back into the initial investment, and a compounded corpus earns returns. In the case of mutual funds, when you invest through SIP, you can invest a small amount of money every month to build a corpus in the long term. Let us see how compounding helps here.

Suppose you invest Rs.1000 every month in a mutual fund through SIP. For ease of calculation, let us assume that the fund gave you 10% returns per month for the first two months.

At the end of the first month, your earnings will be Rs.100, and after reinvesting, the corpus will be Rs.1100. Now, to highlight the point, let us assume that you have not put in your SIP money for the second month. In that scenario, your returns for the second month are Rs.110, even when your rate of return remain the same.

Now, if you had invested Rs.1000 in the second month as well, the corpus at the start of the month would be Rs.2100, and you would end that month with a corpus of Rs.2310.

In the long term, this compounding could do magic to your investments. Let us take the example of a long-term investment to understand this better.

Suppose you invest Rs.25,000 in a mutual fund that gives you 10% annual returns for 10 years.

At the end of the tenure, you will be left with a corpus worth about Rs.51.6 lakh. Here, your investment only accounts for Rs.30 lakh and the rest are the returns from your SIP.

Make a crore with compounding
Making a corpus of Rs.1 crore is a mammoth investment achievement for anyone. For a lot of people, it could be a corpus with which they can even retire. But as tough as it may sound, SIP investments, coupled with compounding, is a good formula with which you can achieve this.

15*15*15 rule is something that can help you here. The rule says that if you invest a corpus of Rs.15,000 per month for 15 years in a fund that gives you 15% returns, you can create a corpus of Rs.1 crore. This, too, is enabled by the magic of compounding.

A word of caution
Although both the above scenarios are possible, it has to be noted that market-linked investments do not guarantee returns. Hence, make sure you do your research before you invest.

But the benefits of SIP don’t end there. Below are some of the biggest advantages of SIP that make the option highly lucrative.

You can start small
With SIPs, you can start your investment journey with monthly investments as small as Rs.500. Affordability is something that keeps a lot of people away from investing. SIPs can eliminate that factor.
And even if you start small, you could create a significant corpus over time. However, the wise option here is to increase your monthly instalment as your income increases to get the best results.

Higher returns
As we have discussed above, SIPs invest in mutual funds, and they tend to give higher returns than traditional and conservative methods of investing.
One important metric to overcome here is inflation. Inflation could decrease the purchasing power of your money. For instance, what Rs.1000 can buy you now can’t be bought a year after. If your investment option manages to beat inflation, you save your saved money from losing its power.

Doubles as an emergency fund
Emergency fund building is another important aspect of everyone’s life. But creating one can be difficult. But if you are creating a SIP mutual fund corpus for any goal, it can double as an emergency fund, helping you in dire times.

The magic of compounding is something that can tremendously help you grow your investment. Make sure you do the research and choose the right fund to make it even more beneficial.

Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully