Mutual Fund Industry
| April 12
To create wealth two doctrines have to be followed consistently – regularity and discipline. Regularity because only then can we rake in numbers continuously. By abiding to disciplined investment you can ensure that the volatility of the stock market is neutralised. That’s the first benefit of investing in Systematic Investment Plan or better known as SIP. Before we expound on this statement, let’s understand what is SIP.
It ‘is a method of investing a fixed sum, regularly, in a mutual fund scheme’. To simplify, imagine you use hundred rupees to buy drop/s of water on the 11th day of every month. The drops of water accumulate consistently creating a mighty ocean. Now apply the same to mutual funds and money. You are regularly investing a pre-defined amount of money (Rs. 100 in the example) in a financial instrument (drop of water in this case) on a set date (11th). Small savings invested regularly that generate a huge corpus in the future.
SIP is the model way to initiate investment and managing personal finances. Laymen have a superficial understanding of the lows and highs of the market. With SIP one does not need to actively time the market before investing. This is the second and probably the biggest advantage of SIP. There is no worry over entering the market at the wrong time, wondering if you missed a huge windfall or if the market is on the edge of a downfall.
The next two benefits of putting money in a SIP are inherently interconnected and they work, particularly well, for the common investor. It inculcates the habit of saving and is deeply convenient for the investor. Beginning a Systematic Investment Plan requires a very, very small amount of money. It can be a 1000 bucks or even just 500. One does not need a Pile of Green, before even thinking of investing. Because it is light on your wallet, SIP becomes a stress-free and convenient investment. Since you have to invest a fixed sum at a fixed date every month, saving becomes a pattern, not a one-off. A drop of water saved every thirty days turns into a vast ocean after 30 odd years. You not only save on resources but also on time as there is no hassle of pondering over when and how much to invest.
SIP is of further advantage for the ordinary investor because they are easy to monitor as it is an automated process. Investing in SIP requires either an auto-debit facility or post dated cheques; therefore keeping an eye on the progress of your investment becomes blindingly simple. A regular statement of accounts is all you will ever need.
The power of a single drop compounding over the years is the last benefit of Systematic Investment Plan we will talk about today. One of the most powerful investment strategies is Time. As someone very rightly said, “it is not market timing that makes money, but the amount of time that you spend in the market”. SIP harnesses this strategy. Over time it transforms a small amount to gigantic payout through the power of compound interest.
Suppose you, at 35 years of age, begin to invest in SIP after being introduced to them by a friend who has been already investing in them for a decade. Both of you have set the amount to be five thousand rupees per month. When the two of you reach the age of 60, you get a payout of approximate 47 Lakhs while your friend gets a return of about 1.1 Crore (we’re assuming an 8% interest rate here). Noticing the vast difference? Time and compounding – the two tenets that work miracles in the case of SIP.
Key benefits of SIP are: A regular habit of saving that gives you the opportunity to maximise your returns without predicting market movements. Start early (or start now), stay longer, be consistent and be disciplined those are the only rules you need to follow.