Why SIP in Index Funds Makes Sense — With Calculator-Based Projections

Index funds track the broad market index like Nifty, Sensex, Bank Nifty, etc. Known for their stability and security, index funds are a perfect choice for investors who wish to protect their capital and returns on the same. Investors therefore select index funds for their stock market investment portfolio to achieve growth as well as receive protection from market volatility. However lumpsum investment into index funds can prove less profitable when compared with systematic investment plans (SIPs). Delivering benefits like rupee cost averaging and long-term wealth creation, Systematic investment plans for index funds can deliver an extensive range of benefits which have been enumerated below:

Rupee cost averaging
The ups and downs in the market are difficult to track but investors can take the benefit of the same by opting for systematic investment plans for investing in index funds. With the advantage of rupee cost averaging, investors can buy more units of the same index fund when the market falls. On the other hand, fewer units can be bought when the stock prices follow an upward trend. This allows investors to average out the unit price of their index fund which in turn helps them to take the maximum benefit of market volatility.

Compounding
With systematic investment plans for index funds, investors can take the benefit of compounding and generate exponential returns. Investors receive returns on both SIP amounts invested every month as well as the returns generated from the same. The compounding effect allows investors to generate returns on the returns which when compared with lumpsum investment deliver better benefits.

Lower expenses
Apart from the benefits of SIP investment, index funds are also known for their cost efficiency. Investors have to pay a lower management fee for investment into index funds when compared with other types of mutual fund schemes.

Benefits of SIP through calculation:
Following is a breakdown of SIP investment into index funds using a mutual fund SIP calculator that can help investors make sound decisions:

Monthly SIP amount ₹5000
Expected rate of return of 12% for investment into index funds on a long-term basis
Investment duration 20 years

Through the use of a SIP calculator, the following results can be ascertained:
Invested amount ₹12,00,000

Maturity value ₹49,90,000
Returns generated ₹37,90,000

A SIP calculator can help investors identify how investing in an index fund using systematic investment plans can offer exponential returns. The returns generated are on a long-term basis day by helping investors to take the benefit of rupee cost averaging and investing regularly and consistently. On the other hand, an investor investing in lumpsum in index funds may generate lower returns. A sudden downfall in the stock market price is due to unforeseen circumstances like political instability etc can lead to negative returns for a few years. Such cases can reduce the overall returns generated by an investor if a large amount is invested in index funds. On the other hand, SIP investment can allow investors to take the benefit of stock market fall by buying more units at a lower price.

Conclusion
Systematic investment plans for Index Funds deliver greater benefits when compared with the other mutual fund schemes and investment options. It serves as a powerful tool which investors can utilise to reap the maximum benefits of investing in index funds.

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