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Association of Mutual Funds in India (AMFI), the apex body of the mutual fund industry, has explained the power of Systematic Investment Plan (SIP) through a very simple and effective example to increase financial awareness among retail investors. Often common employees, small businessmen or college students think that a capital of lakhs of rupees is necessary to invest in the stock market or mutual funds. Busting this myth, AMFI clarifies that the real secret to building long-term wealth is not big money, but long investment time and the discipline of compounding. If an investor invests only ₹ 33 per day i.e. every month only Small savings of ₹1,000 If one invests Rs. 100 crore in a suitable mutual fund for 15 years, then even on the basis of conservative and balanced returns, on maturity ₹3.48 lakh (about three and a half lakh rupees) Can create a strong fund of Rs.
According to the financial model shared by AMFI, when you continue SIP of ₹1,000 every month continuously for 15 years (180 months), the total investment amount from your pocket will be just Rs. ₹1,80,000 (One lakh eighty thousand rupees) She goes. Even if the portfolio gets a very conservative and safe return of 8% per annum on average (which is usually seen in Conservative Hybrid Funds or Balanced Advantage Funds), your total accumulated corpus at the end of 15 years will be around ₹3,48,000 to ₹3,49,000 It happens. This simply means that on the principal amount of ₹1.80 lakh deposited by you, a net profit (compounded return) of approximately ₹1.68 lakh gets added only in the form of interest and capital gains. That means your money almost doubles and comes into your hands.
AMFI also underlined that the 8% return is only a basic and safe parameter. If a young or medium term investor opts for pure equity funds (like large cap index funds or flexi cap funds) which have historically delivered average annual CAGR returns of 12% or more over the long term in the Indian markets, the figure becomes even more attractive.
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At 12% average return: Net wealth gain on total investment of ₹1,80,000 in 15 years works out to be around ₹3,24,000, making your total corpus around ₹5,04,500 (more than five lakh rupees) Reaches.
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At 15% average return: If the market trend remains good and the portfolio gives a return of 15%, then the same monthly installment of ₹ 1,000 would be worth approximately in 15 years. ₹6,76,000 (7.25 lakh rupees) Becomes a big fund. This difference clearly shows how compounding grows exponentially over time.
It is important to understand the power of compounding because it does not work linearly but qualitatively. The famous scientist Albert Einstein did not call compounding the eighth wonder of the world for no reason.
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First 5 years (60 months): By depositing ₹1,000 per month, your investment is ₹60,000 and the interest on it at 8% only adds up to ₹13,400, making the total fund around ₹73,400. In this phase it seems that money is growing very slowly.
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On completion of 10 years: Your total investment comes to ₹1,20,000 and the total fund comes to around ₹1.82 lakh (interest of around ₹62,000).
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On completion of 15 years: The real explosion happens in the last 5 years, when interest starts accruing. In the last 5 years the fund jumps from ₹1.82 lakh straight to the level of ₹3.48 lakh. This is the reason why investors who get impatient and stop SIP in the first 3 to 5 years are deprived of the real benefits of compounding.
AMFI has advised investors to never stop their regular SIP after seeing the daily fluctuations, recession or bullish news of the stock market. When the market falls, you get allotted more units of the mutual fund for the same ₹1,000. At the same time, when the market booms, the value of your already purchased units increases rapidly, which is called ‘Rupee Cost Averaging’. Therefore, the simplest rule of investment is that as soon as the salary or income comes in the beginning of the month, first deduct the SIP installment and meet your household expenses with the remaining money. This SIP of ₹ 1,000 can be started in just 5 minutes with the help of Aadhaar and PAN from the comfort of your home through any authorized AMC, bank app or SEBI-registered mutual fund distributor, which will prove to be a strong foundation for any big financial goal in the future.