SIP has become the most popular way of investing in mutual funds today. Its biggest feature is that you can start investing even with a small amount and can create a big fund with time. This is the reason why lakhs of people are doing SIP of Rs 500, Rs 1,000 or more every month. In such a situation, the question that comes to the mind of many investors is that if only Rs 1,000 is invested every month, then how much time will it take to create a fund of Rs 5 lakh. The answer depends on the returns you get on your investment and the period of investment.
When will a fund of Rs 5 lakh be created at 12% return?
If you do a SIP of Rs 1,000 every month and get an average annual return of 12 percent, then your fund can reach Rs 5 lakh in about 15 years. Your total investment during this period will be around Rs 1.80 lakh. At the same time, the amount of more than Rs 3 lakh will be made only through returns and compounding. Many equity mutual funds have given approximately this level of returns over the long term, so this is considered a balanced estimate.
How much time will be reduced if you get 15% return?
If you get an average annual return of 15 percent on your SIP, then the target of Rs 5 lakh can be achieved in about 13 years and 3 months. Your total investment during this period will be around Rs 1.59 lakh, while the remaining amount will be made up from the returns received from the investment. Better performing flexi cap and midcap funds can see such returns in the long run.
Investment will increase rapidly at 20% return
If an average annual return on investment is 20 percent, then a fund of Rs 5 lakh can be ready in about 11 years and 2 months. Your total investment during this period will be around Rs 1.34 lakh, while more than Rs 3.5 lakh will be generated only through compounding and returns. However, it is not easy to achieve such high returns continuously over a long period of time and the risk involved is also relatively high.
Understand the power of compounding
Compounding plays the most important role in SIP. Even a difference of a few percent in returns can reduce the time taken to reach your financial goals by several years. This is why the difference between 12 percent and 20 percent returns creates a difference of almost four years in the investment period.
Returns in mutual funds are never guaranteed. It depends on market conditions, fund performance, investment period and economic conditions. Returns may be low or even negative in a short period of time. Therefore, while starting SIP, instead of just chasing high returns, one should focus on regular investments, choosing the right fund and maintaining the investment for a long period. This strategy helps in building better wealth over time.
Disclaimer: This article is for information only and should not be considered as investment advice in any way. TV9 Bharatvarsha advises its readers and viewers to consult their financial advisors before taking any money-related decisions.
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