SIPs: Functioning of Cost Averaging & Compounding

SIPs are counted among the top long-term
investment options that are both feasible and fruitful. Not only does it help
encourage the habit of savings in people but it also helps them to gain
considerably from the market in the long run in terms of good earnings and
investment knowledge.  It is always the
features of an investment option that helps investors earn profits from their
endeavours; similarly, in the case of SIPs, it is the features and their functions
that help people the most.

How do SIPs work on averaging and power of compounding?

The following explains howSIPs work on averaging and the power of compounding:

  1. Averaging:SIP investors are urged and required to
    indulge in a regular and timely habit of investments this continuous habit help
    them to gain freedom from timing the market and ensures steady returns through
    cost averaging. This feature works in favour of the investors when they
    continue to invest irrespective of the market condition and NAV of units.  In the case of low market phase, investors
    can buy units at a low price, while they can sell them off at a higher price
    when the market starts to thrive. Over time this continuous practice of buying
    low and selling high helps investors to lower the average price of per unit and
    help them profit through their investment.
  2. The
    power of compounding:
    SIP
    is a friend of those investors who tend to have a limited amount of money to
    invest in the market. The compounding feature of SIP helps investors to create
    wealth and meet their financial goals even with their limited principal
    investment. The regular investing habit of investors and their zeal to continue
    investing for a long-term help them to reinvest their earnings from their
    investment in the market and gain interest on both. Over time this facilitates
    wealth creation and helps investors accumulate sufficient funds for their
    future.

How
averaging and power of compounding help
investors to achieve financial goals?

The cost averaging and power
of compounding feature help investors to magnify their profits from investment
over the long run and help them to achieve their financial goal in a more
organised and systematic way. The cost averaging helps to lower the cost of per
unit which ensures more profits from investments while the power of compounding
helps to generate wealth even with limited investment. Both features accumulate
to offer benefits to the investors which in turn help them to inculcate a
healthy habit of investing regularly in the market irrespective of its phase.
Such a habit also helps investors to emerge confident in terms of investment
and allow them to tackle market risk through their investment decisions.

SIPs definitely work on averaging and power of
compounding but these features work the best when done for the long term and
followed with a through discipline.

Get
in touch with our team of professionals and avail their advice and assistance
to utilise the features of SIPs in your favour and secure your financial future
without any hassle.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 85350

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