Have you ever given reinvestment a thought? Did you know that reinvesting your earnings could give you a far better return than just investing money? Well, yes! This method is called ‘compounding’. It is a way to induce earnings from previous earnings. In simple terms, money is used to make more money. Let us look at how SIPs can be an effective tool to increase your asset size through the effect of compounding.
There are two ways of investing in Mutual Funds; Lump sum and SIP. SIP (Systematic Investment Plan) is now a strikingly paramount way of investing in Mutual Funds. It is a method to participate in the stock markets bit by bit every month or every quarter. A certain amount of your comfort is debited from your bank account and invested in the Mutual Fund of your choice on a tabbed fixed date every month.
Why espouse SIP?
A fixed amount at a fixed date every month when invested gives rise to the power of compounding. It makes you reinvest your earnings rather than getting it redeemed. These reinvested earnings then nourish your returns and help you achieve a better corpus than what you would receive otherwise.
There are countless benefits of Investing in a SIP Investment Plan.
- Rupee Cost Averaging:
Stock markets are usually very volatile. In such volatile markets, investors are always baffled about making investments. Rupee cost averaging aids in dodging the fear of volatility. In SIP, your invested money fetches you more units of the Mutual Fund when the price is low and lesser units when the price is high. This keeps you away from timing the markets which is practically impossible.
- Strict Investing:
Since a fixed date and a fixed amount play the most important role in SIPs, you are coerced to be a disciplined investor. You are obliged to keep the selected amount readily available for deduction every month. This galvanises a sense of financial responsibility and exterminates the need to track the markets spiritedly.
- Manageable to monitor:
You need not seriously take out time to monitor or make investments. It is an automated process of your money being debited from your bank account every month. This leaves you carefree without an ounce of regret having forgotten to make the investment. Periodic statements help you track your investments as per your convenience.
- Can also start with a relaxed amount:
You can be insouciant of the myth of investing being an activity of the rich. SIP can begin with an amount as low as Rs. 500. This enlivens people of all levels to participate. Anybody can invest through the SIP mode, the amount being irrelevant.
- The power of Compounding:
The earlier you start investing, the better returns you effectuate. If spending Rs 10 gives you a profit of Rs 5, the total amount will be Rs 15. So, instead of reinvesting Rs 10, you can invest Rs 15, increasing your profits.
It’s a known fact investment grow your money, but reinvestments grow your money at a faster pace. All you need to remember is the famous quote, “Great things happen little by little and SIP by SIP”.