Under a Systematic Investment Plan a designated amount is auto-debited from one’s bank account and invested into a specific mutual fund scheme. The investor is allocated a certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time, an investor invests, additional units of the scheme are purchased at the market rate and added to his/her account. Hence, units are bought at different rates and investors benefit from the rupee-cost averaging and power of compounding.
If one starts investing Rs 5,000 a month on his/her 35th birthday, in 25 years time he/she would have put aside Rs 40.5 lakhs, in case the investment grew at an average of 7% a year. However, had the same person started investing the same amount 10 years earlier, at 25, it would have been worth Rs 90 lakh at the time of retirement (assuming it to be 60).
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