Albert Einstein called compounding the eighth wonder of this world. How apt his observation was has been proved over the years by many investors who have shown that if money is invested and given time to grow, one can amass enormous wealth.
In mutual fund investing, a Systematic Investment Plan (SIP) is an alternative to lump sum investment. Not all can invest in mutual fund a lump sum or an aggregate amount, so SIP or installment payment is a popular choice. SIP investment allows investors to invest a fixed sum on a monthly basis. One can start an SIP with an amount as low as Rs 100 per month.
Mutual fund SIP calculator:
Suppose you start a job at the age of 20 with a monthly meagre salary of Rs 10,000 and are living with your parents, thus avoiding expenses on house rent, which can save a significant amount of money, especially if you live in a city. Mutual fund SIPs offer an opportunity to invest even with such a low salary. You just need to follow a 50/20/20/10 formula.
Using this formula, allocate 50% of your salary to regular expenditures or essential needs, reserve 20% for leisure activities like shopping and entertainment, set aside another 20% to save and invest for better returns to achieve larger goals such as purchasing a new car or property. Finally, the remaining 10% can be used to start a mutual fund SIP.
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Consider this calculation:
Suppose you invest Rs 1,000 or 10% of your salary in an MF SIP and receive a return of 12%, which is a moderate return based on mutual fund performance in the equity segment over the last decade. By the time you reach your retirement age at 60 years, you could become a crorepati.
The Rs 1,000 SIP at the rate of return of 15% can take you to Rs 1,19,000,00. This is the power of compounding.
Now, if you increase your SIP amount by 10% every year since your income will also grow with each passing year, this SIP over the 40 years can make a corpus of Rs 3.5 crore.
However, if your starting SIP amount is Rs 3,000 and you contribute this for the next 40 years and increase your contribution by 10% every year, your corpus at the time of retirement would be Rs 10.5 crore. To reach this corpus, you need to get an annual return of 12% on your deposits.