How does it work?
Your money is auto-debited from your bank account and invested into a specific mutual
fund scheme. You are allocated certain number of units based on the ongoing market rate
(called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market
rate and added to your account. Hence, units are bought at different rates and investors
benefit from Rupee-Cost Averaging and the Power of Compounding.
During volatile markets, most investors remain skeptical about the best time to invest
and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt
out of the guessing game. Since you are a regular investor, your money fetches more units
when the price is low and lesser when the price is high. During volatile period, it may
allow you to achieve a lower average cost per unit.
Power of Compounding
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who
understands it, earns it... he who doesn't... pays it." The rule for compounding is simple -
the sooner you start investing, the more time your money has to grow.
If you started investing Rs. 10000 a month on your 40th birthday, in 20 years time you
would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year,
it would be worth Rs. 52.4 lakhs when you reach 60.
However, if you started investing 10 years earlier, your Rs. 10000 each month would add
up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would
have Rs. 1.22 Cr on your 60th birthday - more than double the amount you would have received
if you had started ten years later!