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How SIPs Benefit From the Power Of Compounding?

Published On Aug 26, 2021

We aren't exaggerating when we claim that compounding has "power." The compounding impact of a modest bit of money invested on a regular basis over a long period of time can accumulate a large sum of money. Many investors overlook the fact that the compounding effect on their investments is the most important accelerator for increasing wealth and accumulating a large portfolio. The following article elaborates on the power of compounding through systematic investment planning. Let’s understand the meaning of SIP and compounding first. 

What is a Systematic Investment Plan (SIP)?

Systematic investment plans (SIPs) are the most efficient way to invest in mutual funds. You invest a set amount of money at regular times. Each instalment entitles you to a particular amount of mutual fund units. The number of units received varies based on the fund's net asset value (NAV). Compounding works in your favour when you invest on a regular basis.

What is the Power of Compounding?

The interest you earn on your accrued interest is referred to as the power of compounding. Hence, if you invest a given principal quantity of money in a financial instrument and earn interest on it, you will also earn interest on your interest in the later years of your investment due to the compounding effect.

Also read: How To Invest Through SIP?

How SIPs Benefit From the Power Of Compounding?

Due to the numerous benefits that mutual funds provide, they have become a popular financial instrument in recent years. The power of compounding, which is an integral aspect of how mutual funds work and generates exponential returns over time, is one of the advantages. The idea behind a Systematic Investment Plan (SIP) is to take advantage of the compounding impact by investing a small amount of money at regular periods. Over a lengthy period of time, the amount invested grows enormously.

How Can You Take Advantage of Compounding?

Compounding has the advantage of allowing you to appreciate the value of your investments. You can benefit from compounding by-

  • Start Investing Early - The secret to becoming successful is to begin investing as soon as possible. The day you receive your first paycheck is a good time to start your financial adventure. Start investing today if you haven't already. You may find it difficult to reach your destination if you put off saving.
  • Make Regular Investments - Your portfolio will be stronger if you invest on a regular basis. Wealth is best created with disciplined and focused contributions. You can establish priorities. For instance, if you earn Rs. 10,000 per month, consider your pay or income to be Rs. 9,000 and invest Rs. 1000 every month and let the magic of compounding work.  
  • Have Patience - This is the most crucial factor in accumulating riches. It is advised not to make any hasty investing decisions. It must be noted that only when investments are allowed to grow at their own pace can the power of compounding be felt and appreciated. Although it may appear that your investments are not expanding, you may be shocked to see what compounding can do for your portfolio after years of focused and disciplined investment.

Take Away

Now that you've learned about the power of compounding, you should put it to good use. Start investing today, no matter how modest a sum; wait for compounding to take effect, and your tiny sum will grow into a large sum in the future. 

Must read: 

Frequently Asked Questions About SIPs

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.          

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