Master the mathematics of Systematic Investment Plans. Learn how to project future wealth using the Power of Compounding and Rupee Cost Averaging.
Systematic Investment Plans (SIPs) have revolutionized wealth creation for the common man. But how exactly are these returns calculated? In this guide, we dive deep into the mathematics of compounding and rupee cost averaging.
The future value of a SIP is calculated using the formula for an Ordinary Annuity:
FV = P × [{(1 + r)^n - 1} / r] × (1 + r)
Where:
One of the biggest advantages of SIP is Rupee Cost Averaging. When markets are down, you buy more units; when markets are up, you buy fewer units. Over time, this averages out the cost of your investment, reducing the impact of volatility.
Compounding is the process where the interest earned on your investment starts earning interest itself. The longer you stay invested, the more 'interest on interest' you accumulate, leading to exponential growth in the later years.
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