Q1: What is SIP and how does it work?
SIP (Systematic Investment Plan) is an investment strategy where you invest a fixed amount regularly (usually monthly) in mutual funds. It helps in rupee cost averaging and compounding, allowing you to build wealth over time through disciplined investing.
Q2: How is SIP maturity value calculated?
SIP uses the future value of annuity formula: M = P × [((1 + r)^n - 1) / r] × (1 + r), where P is monthly investment, r is monthly return rate, and n is number of months. This accounts for compounding returns on each installment.
Q3: What is the benefit of SIP over lump sum investment?
SIP offers rupee cost averaging (buying more units when prices are low), eliminates timing risk, enforces financial discipline, and makes investing affordable. It also benefits from compounding as returns are reinvested automatically.
Q4: What is a good SIP amount to start with?
You can start SIP with as low as ₹500-1000 per month. A good rule is to invest 20-30% of your monthly income. Start with what you can afford and increase gradually. Consistency matters more than the initial amount.
Q5: How does compounding work in SIP?
In SIP, returns earned on your investments are reinvested, which then earn returns themselves. Over time, this compounding effect significantly multiplies your wealth. The longer you stay invested, the more powerful compounding becomes.
Q6: Can I change my SIP amount or stop it?
Yes, most SIPs are flexible. You can increase, decrease, pause, or stop your SIP anytime. However, stopping early may impact your long-term wealth creation goals. It's best to continue for the planned duration.
Q7: What returns can I expect from SIP?
Returns depend on the type of mutual fund. Equity funds may give 10-15% annually over long term, while debt funds may give 6-8%. Past performance doesn't guarantee future returns. Stay invested for at least 5-7 years for better results.
Q8: Is SIP suitable for short-term goals?
SIP is best suited for long-term goals (5+ years) due to market volatility. For short-term goals (1-3 years), consider debt funds or fixed deposits. Equity SIPs need time to average out market fluctuations.