More often than not, we tend to believe that building wealth is stocking up cash inside a locker or trying to maintain a positive balance in a savings account. While undoubtedly prudent saving is the first step to building wealth, it remains just that – the first step. Building wealth, however, is more about the smarter process of multiplying your savings by investing in the right avenues for a secure future with realistic goals. So is there a way to make investing a habit? Could you do it on autopilot without having to remember it every time? Is it necessary to have a huge amount in order to invest?
What if we told you that an amount as little as Rs 1,000 a month can go a long way in building wealth? What if we told you there was an investment option that can get you great returns despite market uncertainties?
Well, you only have one answer to all these questions – Meet the SIP!
Systematic Investment Plan (SIP)
A SIP is that friend who will help you inculcate the habit of investing regularly and wisely. SIP stands for Systematic Investment Plan. It is the strategy of investing a fixed amount periodically (typically every month) in mutual funds that are apt for you and will help you achieve your goals.
Here are some of the greatest advantages of SIPs:
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Invest on auto pilot – A SIP is a great way to inculcate the habit of disciplined investing as it is a commitment made by you to consciously invest a certain amount regularly. What’s more, once you set up your SIP, the amount is automatically debited from your bank account each month, ensuring that a structured investment is made consistently. In other words, you simply set it up and allow it to run on an auto pilot mode. You do not have to worry about missing an instalment.
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Small sums, big money – SIPs allow you to invest small sums regularly. Unlike a fixed deposit where you need a chunk of money, you can start investing with as low as Rs 1,000 every month in mutual funds and allow it to grow over a period of time. That means you do not have to get rich to start investing. You can start investing early on in your career.
The benefits of early investing are as high as, if not more than, those of disciplined investing. Say, Raj (30) invests Rs 5,000 a month regularly for 20 years with a 10% annual return. He will be able to procure Rs 37 lakhs. However, if he had started investing 10 years earlier, he would have procured 1.13cr at the end of 30 years, given the same base amount and average annual growth of 10%. With SIPs you have very little excuses for not investing!
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The magic of rupee-cost averaging – SIPs allow you to invest in the ups and downs of the market. Since you get to invest across various market phases, you buy more units when the market is down and fewer units when the markets peak. In other words, you actually get to do some bargain hunting automatically! And you do this without the risk of having to time the market. You do not need to know when the market is high or when it is falling. Your SIPs do the job for you. So how does this help? This averaging effectively reduces your cost (as you buy in market lows as well) and therefore improves your returns. But remember, for averaging to work, you will need to invest over long periods of time. Only then will you buy on dips.
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Flexibility – In a SIP, the amount that you choose to invest periodically can be changed at any time. The key benefit here is that as you progress in your career and your income grows, you can increase your investment amount and thereby increase the value of your growing returns. This way, you ensure that your corpus grows as your income grows. In addition, there is no lock-in period in SIP, unlike a recurring deposit scheme in banks. At FundsIndia, the process is made even easier by giving you the option of setting up a Step Up SIP, where you can set frequency and the amount by which your SIP should increase with time.
Here’s an illustration that speaks about the benefit of consistently increasing the value of your SIP and how that impacts the final returns. As seen in the graph, a Rs 1,000 SIP over 10 years, will leave you with just Rs 2.32 lakh. However, had you increased it by Rs 1,000 every year over these 10 years, you will have a handsome Rs 10.2 lakh.
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The power of compounding– One of the biggest advantages of a SIP is the impact of compounding it offers, which is much higher than a Recurring Deposit (RD). Say, Raj invests Rs.1000 a month in an RD for 120 months at an annual rate of 7.5%; his investment would yield him Rs. 1,76,113 at the end of the term. However, if he invests the same in a well performing mutual fund through a SIP, say with Franklin Templeton Blue Chip G (which has been delivering an average return of 13%), the same amount will yield him a return of Rs. 2,42,960 at the end of the same 120 months. With mutual funds, compounding works every single day, unlike your bank deposits, where interest is compounded monthly (RDs) or quarterly (FDs). Which one do you think is better?
Source :Fundsindia.com