How SIP works?

In order to make an investment, you do not require a large sum of money now. The systematic investment plan allows you to make an investment without the necessity of a big amount. Here is a detailed study of how SIP works?

How does a systematic investment plan (SIP) work?

The systematic investment plan or SIP works in a flexible way. If you are investing in SIP, the sum of money that you are investing at a particular interval of time will be auto-debited from your bank account so that you do not forget to make any investment. For a particular day, NAV or net assets is assigned to you. This is the number of units that are allocated to you based on the market rate that is currently going on. With each investment that you make, additional units which are part of the schemes are added to your account after they are purchased at market rate. For this reason, investors make a profit due to the power of compounding and rupee cost average after they buy units on various different rates. This is how SIP works.

What do you mean by rupee cost average?

In the market for investment, people are generally skeptical. They find a perfect time to make an entry. You can finally put an end to all this if you make an investment in SIP because it has the feature of rupee cost averaging method. SIP makes you a regular investor which helps you to fetch the better amount of units provided when the price is low. When the market is facing a volatile situation then for per unit cost you may achieve lower average cost. This is how SIP works in a very cost-effective way.

What does power of compounding means?

The quicker you are investing your money will have a longer time to grow. This is the foremost rule of compound interest. Let us take an example. Suppose the total amount of money that you are initially investing is ten thousand per month. If you make this investment for twenty years then your total investment amount is twenty-four lakhs. Due to compound policy, if the interest of your money is 7% per year, then after twenty years you will get an amount of RS. 52.4 lakhs.

When is the ideal time to start SIP?

SIP can be started at any time when you are opting for a mutual fund scheme that is open-ended. You will need to fill up an application form. After submission, it will take ten to thirty days normally for the bank to start the process.

So start SIP as soon as and use this SIP calculator to to check SIP return on investment