Understand the Power of Compounding in SIP

Now it might not be circumstantially possible for each and every one of us to have sound knowledge about equities, or for that matter, enough time to keep abreast with the daily market and industry alterations. Such investors who have lesser knowledge or exposure to financial markets, who are willing to take some risk with the hope of earning some good profit can consider investing in mutual funds. You can either invest the entire amount at the beginning of the investment cycle or choose to invest in mutual funds through Systematic Investment Plan (SIP).

Today we are going to discuss why SIP investment is a better option while investing in mutual funds and how investors can reap benefits through the power of compounding in SIP.

What is SIP?

Systematic Investment Plan or SIP is a type of investment method where you can invest a fixed amount at regular intervals in an investment scheme. When an investor chooses to pay his/her premium through SIP, a fixed amount is debited from their debit account, generally every month, and is transferred to the financial scheme which they’ve invested in.

Benefits of investing in SIP

Regular disciplinary investing

As stated earlier, SIPs are made at regular intervals, mostly once every month, on a predetermined day. The SIP amount is automatically debited from an individual’s account and transferred to their mutual fund scheme. This punitive approach of regular investments is of significant advantage to the investor as he/she doesn’t need to track the market actively.

Rupee Cost Averaging

Investing in mutual funds through SIP results in all your savings getting safeguarded by Rupee cost averaging. Rupee cost averaging helps an investor beat market fluctuations and makes his/her investment averse to market volatility.

Own several stocks in small quantities

Investors will need a large surplus if they decide to purchase individual shares directly in order to have a diversified portfolio.

What is compounding?

To simplify, compounding refers to the interest earned on the interest or profits earned on the profits from your investments. Instead of withdrawing the gains if the investor decides to keep them invested for a longer period of time, he / she will profit from the power of compounding.

How can SIP benefit from compounding?

An ideal way to benefit from compounding in mutual funds is to start investing as soon as possible. Investing early paves the way for a longer investment horizon. The profitability here increases, and risk on the other end keeps on decreasing. By investing early, you get an opportunity to make early profits which helps you to get to your initial investment amount quicker, and the compounding cycle begins soon.

Key rules of investment to enable compounding

The smartest way to make most out of compounding in mutual funds is to be an early investor. This way, it helps you to have a longer and wider investment horizon. The lengthier your horizon, the more chances you have of making higher profits from compounding. The profitability here increases, and risk on the other end keeps on decreasing. By starting early, you get an opportunity to make early gains which helps you to get to your base amount quicker, and your compounding cycle too starts early.

Next thing to keep in mind for every investor is to have patience. You are not going to gain riches overnight either nor will you gain better profits with short term investments. The motto here is to be patient and let your investments grow in the longer run. Reinvestment here is the key which means you after you receive capital gains from your initial investment, you compounding investment begins. Patience is the key in any investment because letting your money grow at its own pace without snooping around is mandatory.

Monitoring your investments periodically and prioritizing investments at regular intervals helps you maintain a disciplined portfolio. A proactive investment strategy always helps you in avoiding taking unplanned and abrupt investment decisions that can cause harm to your portfolio. Your investments may not be fetching desired results at the moment, but don’t let emotions get in your way. Also staying disciplined will help instill the good habit of setting aside your investment profits for further investments.

Last but not least, keep a close tab on your spending. Having a sound knowledge of where and how much to spend is a practice as important as saving your money. These are some of the habits that will help you in having a better compounding cycle. Keep in mind to not withdraw your capital gains, reinvest, and soon you will find yourself reaching towards your financial goal.

Investing a certain amount every month in mutual funds through SIP doesn’t just help you save, but also allows your money to multiply and help you build a large corpus over a long investment horizon. SIP investment is averse to market volatility, and though you may not fetch great returns during volatile market conditions, you end up investing at lower rates which may fetch you higher profits later. If you have a long term investment horizon, then you stand a chance of benefiting from the power of compounding through SIP is higher.