WHAT IS THE POWER OF COMPOUNDING? STARTING SIP INVESTMENTS EARLY CAN YIELD LONG-TERM RETURNS

Benefits of SIPs: Meera, 62, plans to retire in three years after a successful career. As a single mother, she manages her finances independently. Her friends are curious about how she has prepared for retirement, considering she'll lose her monthly income. Meera has diligently saved over the years to cover her future needs. She intends to generate a monthly cash flow by withdrawing money from her investments. Now, her younger friends seek her advice.

Meera chose to invest her earnings solely in mutual funds because she recognised her lack of expertise in actively monitoring investments. This decision enabled her to employ money in systematic investment plans (SIP) and top-up SIPs.

At the start of her career, Meera aimed to build wealth. SIPs enabled her to save small, fixed amounts regularly (monthly, fortnightly, quarterly, etc.) in equity mutual funds. Since equity markets can be volatile and cyclical, SIPs ensure more units are bought when NAV is low (during market lows) and fewer units when NAV is high (during market highs). This approach is beneficial for investing in equities as it helps smooth out market fluctuations and steadily grow money over the long term.

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Meera began her investment journey with a modest SIP of Rs 5,000 in equity mutual funds at the age of 21, amidst financial challenges early in her career. Over time, as her income increased annually, she boosted her SIP amount by 10% using the top-up facility. This disciplined approach allowed her to accumulate a substantial corpus of Rs 43 lakh by the age of 35.

This corpus served her various life goals: she utilized Rs 30 lakh for a house down payment, Rs 50 lakh for her child's education at 50, and another Rs 50 lakh for her child's business venture at 58. Remarkably, even after these withdrawals, she will still retire comfortably at 65 with Rs 5.5 crore. This exemplifies the power of compounding, where even a small monthly investment can yield significant returns over time. Notably, one can start an SIP with as little as Rs 500 a month.

Through mutual fund SIPs, Meera leveraged the advantages of long-term compounding. The top-up facility expedited her financial goals, even as a single income earner. The key lies in allowing investments time to flourish. Investors, following Meera's example, can fully unlock the potential of compounding by initiating SIPs early and maintaining them over the long haul.

With inputs from Centre for Investment Education and Learning content which appeared in Economic Times