Free Flow Of Thoughts ✨: Index Funds + SIP + Power of Compounding = Financial Freedom

Kumar Raja, Tiana#

Index Funds + SIP + Power of Compounding = Financial Freedom

“My Advice - Buy The Index” – Warren Buffet


Nifty 50 Index is a stock market index that comprises Top 50 companies listed on the NSE. This Index is used as a benchmark for performance of Indian equity. Investing in the Nifty 50 index can be done through Index Funds or ETFs. This is a Passive Investment Strategy. Here the fund manager does not try to beat the market by picking and choosing individual stocks, but simply matches the performance of the Index. Hence the cost of fund management is significantly lower thereby passing on more returns to the investors.

Systematic Investment Plan (SIP) is a method of investing in which a fixed amount of money is invested at regular intervals, let’s say 1st of every month, into an Index Fund. SIP allows investors to average out the purchase price of the fund units over time, reducing the impact of market fluctuations. SIP allows investors to invest small amounts of money regularly, making it a convenient option by investing small amounts regularly over time. SIP allows investors to take advantage of the power of compounding, which can lead to a significant growth in the value of the investment over the long-term. Index funds can be easily liquidated in part or full in case of any emergency. SIPs are flexible and can be pause, stop, increase or decrease the investment amount as per the requirement.

To illustrate the power of compounding, consider the case of Ms. A  who invests Rs. 1000 per month for 25 years at a 15% annual rate of return. The total investment made would be Rs. 3,00,000, but the total return would be more than Rs. 32,00,000. This is the magic of compounding, as the returns generated by the investments are reinvested, creating a snowball effect that causes the investment to grow at an increasing rate over time.

For asset diversification and reduce volatility of your overall portfolio, you can consider S&P 500 US Index, Gold & Silver ETFs, Real Estate Investment Trusts (REIT), Debt funds & Fixed Income Plans.

Now, let's work through an example. Imagine you invested a lumpsum of Rs. 10 lacs and it grew at a 15% annual rate of return. Can you calculate the total value of the investment after 50 years?

It's always recommended to consult with a Financial Advisor or do your own research before making any investment decisions.

~ Kumar, Tiana

Comments

  1. PACFebruary 26, 2023 at 3:34 AM

    Thank you Kumar, to someone like me who still views stocks & shares from a safe distance, that was a master class in a palatable cookie format! 👍👌👏🙏

    ReplyDelete

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