SIP: Investing a certain quantum of money every month - in hope of accumulating a much higher sum in future. An SIP is usually associated with the investment in mutual funds. It is an MF version of erstwhile Recurring Deposit (RD). Each investment in an RD can be treated as a monthly commitment towards a fixed deposit. Let us say, an RD of 2 years, the first instalment stays for 24 months and the second for 23 months and so on - the last instalment stays for 1 month. At the end of 24 months, the entire corpus collected along with accrued interest is returned to the investor. The rate at which the interest will be accrued will be pre-fixed. The first instalment generates interest for 24 months, while the last one generates interest for just 1 month.
A SIP in MF in that context is the same - you keep investing a fixed sum every month in a mutual fund scheme. Except, there are a few caveats - which works well for investors with patience and may not work well for investors who are impatient.
There is no pre-fixed interest rate for SIP in MF. By the way, there is no concept of interest rate at all, in mutual fund investments. If there is no interest at all, how does the corpus earns money? On a daily basis, the mutual fund publishes Net Asset Value - NAV for all its schemes. For an investment, units are allocated to investor based on NAV. Let us say, the NAV of XYZ scheme is Rs 10. An investor invests Rs 1000 today in the said scheme. 100 units are allotted to him. Now, his money is converted into mutual fund units. The next month, NAV falls to Rs 9. Investor invests Rs 1000; 111.11 units will be allotted to him. Now after 2 months, his total units will be 211.11 and his Rs 2000 investment will be worth: 211.11 * 9 = Rs 1900. So there is no guarantee that the investment will always travel upwards. On the other hand if the NAV had risen to Rs 11, he would have got allotted 90.09 units and his total units of 190.09 will be worth 190.09 * 11 = Rs 2100
There might be very less chance of losing money in an RD in bank - though it might have lost the real value after accounting for inflation. But there are good chances that a SIP, done for a shorter duration of time may end up less than the investment value.
At the end of RD, you need to mandatorily get back your amount - not necessarily the case in MF. You can keep the amount in MF to grow, even after the SIP period has ended.
Usually there is a penalty for premature withdrawal of RD. Similarly, each investment of SIP has an associated exit load if withdrawn before certain period of time - the penalty percentage and the minimum commitment time differs from scheme to scheme.
By the way, RD is a product on its own; SIP is a way of investment.
CAGR - Compounded Annual Growth Rate is an important measure in determining how an investment performs over a given time period. As on the day of evaluation, CAGR is the uniform rate which when applied for each instalment, accounting for the duration each instalment is invested for, would give the current amount - the total accumulated units valued at the current NAV. Sometimes, this CAGR is also called IRR or XIRR.
CAGR is one of the important benchmark in determining how the investment has fared over the years. Though a point in time CAGR for evaluating mutual fund schemes is not so helpful.
A SIP in MF in that context is the same - you keep investing a fixed sum every month in a mutual fund scheme. Except, there are a few caveats - which works well for investors with patience and may not work well for investors who are impatient.
There is no pre-fixed interest rate for SIP in MF. By the way, there is no concept of interest rate at all, in mutual fund investments. If there is no interest at all, how does the corpus earns money? On a daily basis, the mutual fund publishes Net Asset Value - NAV for all its schemes. For an investment, units are allocated to investor based on NAV. Let us say, the NAV of XYZ scheme is Rs 10. An investor invests Rs 1000 today in the said scheme. 100 units are allotted to him. Now, his money is converted into mutual fund units. The next month, NAV falls to Rs 9. Investor invests Rs 1000; 111.11 units will be allotted to him. Now after 2 months, his total units will be 211.11 and his Rs 2000 investment will be worth: 211.11 * 9 = Rs 1900. So there is no guarantee that the investment will always travel upwards. On the other hand if the NAV had risen to Rs 11, he would have got allotted 90.09 units and his total units of 190.09 will be worth 190.09 * 11 = Rs 2100
There might be very less chance of losing money in an RD in bank - though it might have lost the real value after accounting for inflation. But there are good chances that a SIP, done for a shorter duration of time may end up less than the investment value.
At the end of RD, you need to mandatorily get back your amount - not necessarily the case in MF. You can keep the amount in MF to grow, even after the SIP period has ended.
Usually there is a penalty for premature withdrawal of RD. Similarly, each investment of SIP has an associated exit load if withdrawn before certain period of time - the penalty percentage and the minimum commitment time differs from scheme to scheme.
By the way, RD is a product on its own; SIP is a way of investment.
CAGR - Compounded Annual Growth Rate is an important measure in determining how an investment performs over a given time period. As on the day of evaluation, CAGR is the uniform rate which when applied for each instalment, accounting for the duration each instalment is invested for, would give the current amount - the total accumulated units valued at the current NAV. Sometimes, this CAGR is also called IRR or XIRR.
CAGR is one of the important benchmark in determining how the investment has fared over the years. Though a point in time CAGR for evaluating mutual fund schemes is not so helpful.
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