You need not time the market when your investments are going through the SIP mode. Because it is a trouble-free investment mode which helps you achieve your various financial goals.
After the PM Modi’s demonetization move, people are muddled up with their investments. Is it time to invest or to stop the current investments which are going on and redeem the money instead? This type of elusive decision can be sorted out when you are investing your money through SIP (Systematic Investment Plan).
Well, investments through the SIP mode does not require you to think about the market’s up and down. It is a process where according to your choice you can invest your money on a weekly, monthly or quarterly basis. It is an approach to do dedicated saving every month and create wealth in a certain period of time.
How to plan for SIP?
To plan for a SIP, firstly think of a financial goal because any investment you do should have a purpose to it. Pre-calculated instalments automatically get deducted from your bank account through ECS (Electronic Clearing Service) mode for a specific time period and are transferred to the scheme(s) in which you need to invest your money. Through the invested money you are allotted units as per the NAV(Net Asset Value) of that date. These schemes are offered by various AMC’s (Asset Management Companies). This time period and the amount is defined as per the customer’s comfort level to achieve their financial goals. The whole phenomenon of doing this dedicated periodical investment is termed as the systematic investment planning.
How to create wealth through SIP?
Return on investments plays an important role in creating wealth through systematic investment plans. Every scheme offered by AMC’s gives you a compounded return. These returns, over a period of time, help you in creating wealth for your particular financial goals, which can be your retirement, purchasing a house, wedding planning or an education goal.
The Power of Compounding: It is a highly powerful income-generating tool which helps in beating inflation. When the investments gain an exponential growth over a period of time, it is known as compounding. Here, interest on interest is added to the principal amount periodically.
Suppose, at an age of 30 you have started investing Rs.5000 towards your retirement goal till you attain the age of 60. Total invested amount will be Rs.18 lakhs. The accumulated capital appreciation over a period of 30 years will be approximately Rs.3.5 Cr. It’s not the miracle but the power of compounding which helped you gain a profit of Rs.3.32 Cr. (Assuming rate of return of 15% per annum)
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Rupee Cost Averaging: When markets are volatile and you are confused about investing your money in the market because your speculations are not working at that point of time, RCA helps in letting you out from that scenario where there is no need to speculate or time the market. When the price is low, you get more units & vice versa. Despite the volatility, if your money is getting deducted from a specific time period, the rise or fall of unit price at that particular time gets average out.
Consider the following example that if the units are averaged out we get more units than going for a lump sum investments.
Suppose Mr.X invested Rs.18000 lump sum in the month of August when the NAV was 25. The units purchased by Mr X were 720 units (18000/25).
Similarly, Mr Y invested the same amount through SIP, Rs.1500 per month for 1 years where he availed the benefit of rupee-cost averaging. The units purchased by Mr Y at the end of the year were 838.56 units and 838.56 units will definitely have higher returns than 720 units at the end of one year. However, at the timing of redeeming money, insure that the market is on the higher side because mainly in case of lump sum NAV of the redemption month has a major impact on your investments.
Rupee cost averaging is an effective approach for investors which helps them to gain over a long-term. If you are investing in a period of the low price level, RCA helps you to get more units but it should always be taken into consideration that rupee-cost averaging never eliminates or reduces the risk while doing investment.