What took a year a decade ago now takes just a month. Systematic Investment Plans have gone from INR 44,000 cr/year in 2016-17 to INR 1,56,000 cr in 2022-23. Compounding with SIPs has become the way to go!
While compounding is a remarkable wealth-building force, Systematic Investment Plans (SIPs) are the ideal vehicle for benefitting from compounding's potential. As of September 2023, there were approximately 7.13 cr SIP accounts actively contributing to Indian Mutual Fund schemes as compared to 1 cr account in April 2016. This shows that Indian investors have embraced SIPs. In this blog, we will explore how compounding and SIPs work together to be the magical wand in growing your money steadily and safely. Let us start!
Compounding is the process of earning interest or returns on your initial investment and gaining more interest on the interest you have already earned. Let us break it down with an example for better understanding.
Imagine you invest INR 1,00,000 at an annual interest rate of 10%. In the first year, you will make INR 10,000 in interest. This brings your total to INR 1,10,000. Now, here is where compounding comes in. In the second year, you will earn 10% interest not just on your initial INR 1,00,000 but also on the INR 10,000 you earned in the first year as interest. So, you will make INR 11,000, not just INR 10,000.
|Year||Invested Amount (INR)||Return (INR, Non-Compounded)||Return (INR, Compounded)|
This process continues. After a few years, you will notice exponential investment growth over time. This is what compounding is.
A Systematic Investment Plan is a straightforward and disciplined approach to investing in any financial instrument like mutual funds, bonds, and even stocks. Instead of putting a big part of your money into an investment all at a time, you decide to put in a fixed amount at regular intervals. This regularity can be monthly or quarterly, whatever suits your financial rhythm and inflows.
SIPs thrive on consistency. So, this disciplined approach can change your investment game for good. They come with the following benefits that can make a big difference in your financial planning:
In the initial stages of your SIPs, your wealth might not increase much. But, an SIP is not a sprint but a marathon. Consistently adding to your investments or re-investing your returns can magnify the compounding effect. Moreover, time is one of your most potent allies in investing. The longer your money compounds, the greater the potential for exponential growth.
Let us understand the magic of compounding with the help of an example.
Who will have more money at 65 – Ananya or Mallika?
Ananya, who started investing at 25 years old and made ten total payments of INR 50,000, will end up with approximately INR 1.09 cr at age 65. Mallika, the 35-year-old who made 30 total payments of INR 50,000, will end up with approximately INR 74.28 lacs at age 65.
SIPs and compounding align well with changing investment trends and economic scenarios. In addition to starting early and leveraging rupee cost averaging, here is how you can benefit from SIPs and compounding:
So, when you embrace SIPs effectively and allow your money to compound, you can watch your investments grow exponentially, helping you to achieve your financial goals.
Compounding is essentially earning on earnings. SIPs make this process easy with affordability, convenience, and risk reduction through rupee-cost averaging. Leveraging compounding with SIPs involves intelligent strategies such as early starts and diversification.
Consider starting your journey to financial prosperity with SIPs and see your wealth multiply. Earlier, SIP was limited to mutual funds. However, Grip Invest brings systematic investment to non-market linked assets like corporate bonds. Learn how SIP works for corporate bonds and stay updated with the latest financial trends.
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