Systematic Investment Plan (SIP) is a simple, time-honored strategy designed to help investors accumulate wealth in a disciplined manner over the long period of time and plan a better future for them. This disciplined approach of investing provides with the following benefits:
- Power of Compounding
- Rupee Cost Averaging
Power of Compounding – The benefit of investing NOW
Most of us delay investments until the last moment. Needless to say, the longer one delay, the greater will be the financial burden on him to meet his financial goals. On the other hand, one would be surprised what one could achieve by saving a small sum of money regularly at an early age. Moreover, the earlier one invests, the longer his money works for him and greater will be the power of compounding.
The power of compounding underlines the importance of making his money work for him at an early age.
Take this example.
Shyam starts saving Rs. 5000 every year from the age of 20 and continues to do so till he reaches 35, after which he stops making any further investment. Sanjay starts saving Rs 12,000 every year from the age of 35 and continues to do so till he reaches 65 years of age. If both earn, say, 12% per annum on their investments, which of them would be wealthier when they retire at 65?
Surprising, isn’t it?
At 65, Shyam would have accumulated Rs 55.84 lakhs whereas Sanjay’s wealth would have been lower at Rs 28.92 lakhs.
The power of compounding can have a significant impact on wealth accumulation, especially if one remains invested over a long period of time.
Rupee Cost Averaging – The power of disciplined investment
Investing would be simple if one always picks the best time to buy and sell. However, timing the market consistently can be a difficult task and one could be hit with a loss sooner or later. What one needs is an automatic market-timing mechanism like Rupee Cost Averaging (RCA) that eliminates the need to time your investments.
In other words, with RCA, you don’t have to worry about where share prices or interest rates are headed. You simply invest a fixed amount at regular intervals, regardless of the NAV. The idea is that you buy fewer units when the NAV is high and more when it is low – automatically. This is in line with our natural desire to buy low and sell high.
For instance, you could opt for a Systematic Investment Plan (SIP) by investing Rs 1000 every month into an open-ended equity scheme with an NAV of Rs 10. The average cost per unit under the SIP will always be less than the average purchase price per unit, regardless of whether the market is rising or falling or fluctuating.
RCA, however, does not guarantee a profit. But with a sensible and long-term investment approach, it can smoothen out the market ups and downs and reduce the risk of investing in volatile markets. In a nutshell, RCA is an efficient and convenient vehicle to accumulate wealth in a time-bound and disciplined manner.
So when is the best time to invest? This month, next month…every month, starting right now!!
Save yourself from the trouble of doing the same thing. You do not have to take time out from your busy schedule to make your investments. Enroll for the SIP by starting an account and providing post-dated cheques of periodic investments (monthly, quarterly) based on your convenience. You can relax once you have sent in your cheques with the completed Enrolment Form.