SIPs are a great way to invest a small amount into the stock market over a long period of time to generate a huge return. If you are thinking that how small amounts can help you accumulate huge returns after a long period, then here are some details of how SIPs work and how you can invest in them to accumulate your desired level of wealth.
How do SIPs work?
SIP or Systematic Investment Plans are investment vehicles where you can invest in mutual funds of your choice and from any amount starting from mere Rs. 100 every month. Most people shy away from investing in the market just because they think they would need a lot of capital to start investing. While, with SIPs, it is absolutely easy to start investing even with just Rs. 100 or Rs. 500 depending on the scheme you are opting for.
These small amounts you invest every month get accumulated, and due to the compounding of the returns, your investment grows exponentially over a long span of time. You can understand this using the SIP investment return calculator.
Case 1:
You invest Rs. 5000 every month for 5 years in a SIP which provides an average return of 12% p.a. So, using the SIP calculator you can find out how much return you can generate.
Total investment in 5 years – Rs. 300000
Return – Rs. 112000
The total value of the investment after 5 Years – Rs. 412000
Case 2:
Everything remains the same from the above case, just the tenure changes to 15 years.
So, total investment in 15 years – Rs. 900000
Returns generated – Rs. 16,23,000
The total value of the investment at the end of the 5th year – Rs. 25,23,000
Observation
In both cases, the amount you invest every month is the same as Rs. 5000, and the rate of return is the same i.e. 12% but the difference is in the tenure of investment. When you invest for a short period – five years, the return is only Rs. 1,12,000 while for 15 years, the return increases by almost 15 times while your investment only increases by 3 times.
Thus, using this SIP investment return calculator, you can easily find out how SIPs can help you grow your wealth even with small investment amounts every month over a long period.
How do use SIPs to generate wealth over the long term?
Now, you know that SIPs can help you generate the desired amount of wealth even if you invest small amounts every month. However, there are certain factors that you need to take care of to earn the maximum returns using SIPs.
- The first factor which you need to keep in mind is starting as early as possible. Using SIPs to generate wealth is a time-taking affair. As you just read in the case study mentioned above using the SIP calculator, if you keep on investing for a longer period, then you can generate way more return than an investment made for a shorter period. However, as a person grows, responsibilities build up, and a lot of financial commitments come for which you would need money. Thus, the best way to accumulate the desired amount is the start early. You can start as soon as you start your career.
- Secondly, make sure to not fail any SIP investments as that will affect your returns. This will not only help you earn good returns over time but help you build a good financial habit and also help you budget your expenses. You can also use the SIP investment return calculator to find out how much you can earn on the excess income you have and accordingly you can invest in other schemes of mutual funds to accumulate more wealth.
- Finally, you need to have the patience to see your wealth grow. Do not withdraw if you have a cash crunch or if there is a market crash. These will pass but if you withdraw your investments, your returns cannot be generated again which has already been accumulated.
So, from the above examples and using the SIP calculator, it is easily understandable that by using SIPs, one can earn a huge return if he or she invests and stay invested for the long term.