What is a Systematic Investment Plan?
All of us have financial dreams like owning a big house and a luxury car, going on a world tour, giving our children the best in terms of education, planning for their marriage and our retirement. Achieving these dreams may seem quite a daunting task but a step-by-step and disciplined approach to wealth building can help bridge the gap between dreams and reality. Just like “Little drops of water make the mighty ocean”, a Systematic Investment Plan (SIP) which entails investing a small amount of money at regular intervals can help you accumulate the desired corpus.
Small steps can take you a long way: Start an SIP
While SIPs are commonly associated with mutual funds, allowing you to invest a predefined sum every month or quarter, this powerful financial planning tool can be applied to all other financial and non-financial assets viz. Equities, Gold, Recurring Deposit (RD), Debt Funds, etc.
Building wealth via systematic investing
Let’s say you earn Rs 100,000 every month, of which you wish to invest 30% which comes to Rs 30,000 each month in equities for 20 years. Assuming a reasonable return of 12%, you will end up with Rs 2,96,77,660 . It is the Power of Compounding! , making it easy for you to meet your financial goals.
Remember, the power of compounding works best if you invest for the long-term. So starting early is as important as investing regularly!
Starting early + Investing regularly = Wealth Creation
Why does it make sense to invest regularly?
- Makes you a habitual saver– A Systematic Investment Plan (SIP) inculcates financial discipline and makes investments a high priority. SIP also helps you to draw up a clear budget for your expenses and other savings, making your financial life uncomplicated and easy. As “the early bird catches the worm”, putting aside a small amount of your income regularly can help you amass significant wealth in the long-term.
- Allow you to benefit from the power of compounding– systematic investing can have a magnifying effect on your portfolio. Even a small investment of Rs 1,000 can swell to a huge amount in the long run, especially if you start early, allowing more time for your money to compound.
- Extremely convenient as you don’t have to commit a large chunk of money– Investing a small sum regularly won’t disturb the functioning of your financial life and yet help you realize your goals. Investing regularly also saves you the hassles of committing a lump sum when your financial goals such as retirement are nearing.
- Flexibility– investing regularly allows you the option of increasing or decreasing the investment amount to suit your changing financial goal requirements.
- Makes you a good money manager– saving regularly means that you have enough for the rainy day and for meeting your short and long-term financial goals and ensures that you borrow less, easing any financial related stress.
- Saving regularly also helps to combat inflation- a penny saved is a penny earned. Regular investing can help protect your savings.
- Helps you tide over market volatility- a Systematic Investment Plan (SIP), which works on the rupee cost averaging principle, helps to smooth out your returns and eliminates the need to time the market as investing regularly means that you remain unworried over market highs or lows, giving you the opportunity to maximize your gain and even use a bear market to your advantage.
Investing regularly is extremely beneficial in the case of mutual funds, Gold ETFs and equities. This is because your money will fetch you more units/shares when the NAV/price is low and vice versa, thus averaging out the cost of investing, and helping in reducing risk and generating better returns. Say, you invest Rs 2,000 each month at a NAV/price of Rs 20 per unit/share. In month 1, you will get 100 units. If the NAV/price drops to Rs 10 in month 2, you will get 200 units/shares. For Rs 4,000 invested over 2 months, your total units are 300. If you invest a straight sum of Rs 4,000 in month 1 when the NAV/price is Rs 20, your net units at the end of month 2 will be only 200, this is where systematic and regular investing works out better.
3 Golden rules of making the best out of SIPs
- Align your Systematic Investment Plan (SIP) to your goals– you can create a SIP for each financial goal, whether it is child’s education or going for an annual holiday.
- Choose an asset based on your goals– for long-term goals, equity exposure can be high, while for a yearly goal like paying child’s education fees, it is best to regularly invest in a debt fund or RD.
- Invest for the long-term- this will allow you to make the most of the power of compounding and rupee-cost averaging principle and help you overcome market cycles.
In a nutshell, investing systematically is a wise move and in order to reap its benefits, it is important to invest for the long run and start early to help generate a sizable corpus.