Power of Compounding: Start investing early in SIP to get more returns in long term The top-up facility helped her fast- track her financial goals despite being a single income earner. The trick here is to give ones investments time to grow
Seema is 62 and wants to retire in three years after a successful career. She is a single mother, managing her finances independently. Her friends wonder how she has planned her resources and finances to retire comfortably, knowing well that she will lose her monthly income. Seema has made sure to save enough over the years to cover her future needs. She has planned in a way that she will withdraw money from her investments to generate a monthly cash flow. Her younger friends have now asked her for advice.Seema has invested her earnings only in mutual funds because she realised early on that she lacked the expertise to monitor her investments actively. This has allowed her to utilise unique strategies like systematic investment plans (SIP) and top-up SIPs.
When Seema began her career, she focused on creating wealth. SIPs allowed her to start saving small, fixed amounts at regular intervals of her choice (monthly, fortnightly, quarterly, etc.) in equity mutual funds. Equity markets are volatile and typically move in a cycle. The SIP mechanism ensures that more units are purchased when a scheme’s NAV is low (during market lows) and fewer units when the NAV is high (during market highs). This method is great for investing in equities because it helps smoothen out the market ups and downs, and grow the money steadily over the long term.
Seema started investing with a small SIP of Rs.5,000 in equity mutual funds at the age of 21, when she had just started her career and faced a perennial liquidity crunch. As her income grew each year, she increased the SIP amount by 10% through the top-up facility. By doing so, she was able to accumulate a corpus of Rs.43 lakh by the time she was 35 years old. She was able to take out Rs.30 lakh to make a down payment on a house, another Rs.50 lakh to fund her child’s education when she was 50, another Rs.50 lakh to fund her child’s business venture at 58 years, and still retire with Rs.5.5 crore at 65. This is what the power of compounding of a small monthly amount can achieve over a long period of time. One can even start an SIP with an amount as low as Rs.500 a month.
Through mutual fund SIPs, Seema truly harnessed the benefits of long-term compounding. The top-up facility helped her fast- track her financial goals despite being a single income earner. The trick here is to give one’s investments time to grow. Investors like Seema can fully realise the power of compounding if they start early and stick with their SIPs over the long term.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
