People often get confused while investing money – more because there are numerous financial products available in the market today. However, if you don’t want to speculate and want good returns, then mutual funds may be a good option for you.
Although there are many ways to invest in mutual funds, but Systematic Investment Plan (SIP) is one of the best ways of entering into mutual funds, where one can do a small amount of investment every month in a scheme of one’s choice. SIP helps you in doing disciplined saving towards a particular financial goal. You do not have to time the market when your investments are going through the SIP mode. You do not even require to think of the market’s volatility on a daily basis. However, while investing a lump sum amount you need to time the market and also need to take proper guidance of a financial adviser.
It is an investment process where you can invest your money on a weekly, monthly or quarterly basis, depending on your choice and need. If you are new in making investments, then typically the problem of how to invest and when to invest money can be sorted out if you are investing your money through the SIP mode. It can be a trouble-free mode of doing investment when someone does one’s investments for a longer period of time.
The best way to plan for SIP is to plan for a financial goal and the total amount you need to achieve at a given period of time. Any investment you do should always have a purpose attached to it. This helps you in doing dedicated savings, else you will always remain with a dilemma whether to invest or to stop the current investments or redeem money as per the market conditions at any point in time.
Once you opt for a SIP in a particular scheme, pre-calculated installments for fixed tenure automatically get deducted from your bank account through the ECS (Electronic Clearing Service) mode. When your money gets invested, you are allotted units as per the NAV(Net Asset Value) of that date. These mutual fund schemes are offered by various AMC’s (Asset Management Companies). The time period and the amount is calculated as per the customer’s comfort level to achieve their financial goals easily within the time-frame. The whole process of doing this dedicated periodical investment towards a particular financial goal is termed as the systematic investment planning. However, you may also link other investment avenues towards that goal and may reduce your monthly SIP amount.
The interest you earn over a period of time on your investment plays an important role in creating wealth through systematic investment plans. Every scheme offered by AMCs provides a mean annualised compounded return, basically termed as CAGR when investment is done for a period of more than one year. The compounded returns over a period of time help you in achieving your particular financial goals by doing small savings. These goals can be your retirement, house purchase, wedding planning, an education goal, etc.
The power of compounding: It is a highly powerful income-generating method which provides inflation-beaten returns. When investments gain an exponential growth over a time period, it is termed as compounding. Simply, the interest on interest gets added to the principal amount periodically which gets multiplied over a time period and helps you generate a good amount of corpus.
Suppose at an age of 30 you have started investing Rs.3000 towards your retirement goal till you attain the age of 60. Total invested amount will be Rs10.8 lakh in the SIP mode. The accumulated capital appreciation over a period of 30 years will be approximately Rs 2.1 crore. Hence, one should know that it is not the magic but the power of compounding which helped you gain a profit of almost Rs 2 cr (assuming a rate of return of 15% per annum).
Rupee Cost Averaging: This is one of the benefits associated with SIP investments. When markets are volatile one gets confused about making one’s investments in the market because most of the time speculations do not work at a particular point of time. Under such circumstances, RCA helps one in coming out from that scenario where there is no need to speculate or time the market. Simply, when the price is low, one gets more units & vice versa. Despite the fact that the market remains volatile, if one’s money is getting deducted for a specific time period, the rise and fall of unit price at that particular time gets averaged out.