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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