Investments can be defined as the process in which you decide to allocate a part of your monthly income into an investment tool to generate wealth for the future. One of the most common investment tools used by Indian investors in mutual funds. In this scheme, an AMC collects money from a group of investors and once enough wealth is pooled, they used the pooled money to invest in securities. The revenue generated from the scheme is then distributed proportionately across different investors.
If you are opting for a mutual fund, you also need to decide the way you want to invest in the mutual fund. There are two ways namely lump-sum investment and a systematic investment plan or SIP. Under lump-sum investment, you are expected to pay the investment amount in one go. In comparison, a lot of investors who are also working professionals opt for SIPs as they find it convenient for their wallets.
What are SIPs?
They are an investment mode through which you can invest in mutual funds every month, instead of investing the entire amount in one go like it is done in a lumpsum investment. SIP investments can be scheduled either monthly, quarterly, or even semi-annually. After investing gradually in this manner, it can become easier for you to achieve your financial goals. The amount invested through a SIP lets you purchase a certain number of fund units. Regardless of the market conditions, if you kept investing in the fund, after continuing this action for a long time, you end up accumulating a considerable amount of wealth. Once the investment tenure and frequency have been determined, you can opt to automate your investments by leaving a standing instruction to transfer the amount directly from your bank account into the mutual fund SIP of your choice, on a certain date.
Why invest in SIPs?
Here are the important reasons to consider SIP as a mode of investment:
- SIPs are affordable and flexible:
In a SIP, you, as an investor have the flexibility to choose things like the amount, interval, and duration of the SIP. Moreover, depending on the financial situation, you also have the option to either increase or decrease your investment, and even pause or stop the SIP.
- You also get to enjoy the advantages of the feature of compounding:
Investing money through SIP enables you to take advantage of the power of compounding. In compounding, you earn interest upon interest as it is added to the original amount. The feature of compounding is very beneficial for long-term wealth creation.
How to decide on a SIP amount?
Thanks to the internet, it is very easy for one to decide on their SIP amount. All you need to do is use the SIP calculator, which will help you in ascertaining the money you need to invest every month. Mentioned below are the steps involved in determining your monthly investments in case you want to accumulate ₹2 crores at the time of your retirement:
- Type in the monthly investment amount:
The first thing that you need to do while using the calculator is to type in the investment amount on the space dedicated to it. So, in this case, try typing in ₹20,000.
- Set the expected rate of return:
Once you have added the amount, secondly, you need to set the expected rate of return on your investments. So, in the space dedicated to it, add 12%.
- Set the duration of your investments:
Once the monthly investment amount and the expected rate of return have been set, all you need to configure is the duration for which you can continue investing in the scheme. In that space, please add 21 years for this case.
The result you will find in the calculator for the example is ₹2,27,73,484. Simply put, to accumulate nearly ₹2 crores at the time of retirement, you need to invest ₹20,000 every month on the SIP for 21 years.