Posted On Friday, Oct 11, 2013
Investing your money rightly is very important to help your money grow for you. While you know the importance of investments to lead a secure life with adequate monetary support, it’s important for you to understand the correct way of investing to generate wealth out of your savings. One of the most disciplined way of investing is going through the SIP (Systematic Investment Plan) route. By regular systematic investments, you could be pleasantly surprised what could the fantastic 4 powers of the SIP route do to your savings.
What is an SIP (Systematic Investment Plan)?
An SIP is a vehicle offered by mutual funds to help investors save money wisely and regularly in order to meet their financial goals effectively. It is an investment strategy which allows an investor to invest the same amount in a particular mutual fund at a specified time period. It may be daily, weekly, fortnightly, monthly, quarterly depending on the will of the investor.
Let's take a look at the fantastic four powers of SIP:
In SIP one starts investing a fixed amount regularly. Therefore, one end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, those who are not well versed with the swings of the market would stay away from buying when the markets are down. They mostly tend to invest when the markets are rising. Starting an SIP tends to bring discipline to our portfolio as SIP investors buy even when the markets are low, which actually is the best time to buy.
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In simpler words, the interest you will earn from your invested amount will be re-invested, and thus increase your principle amount. Starting a Systematic Investment Plan (SIP) will help you harness the power of compounding as you invest a set amount every day/week/month etc irrespective of the wild swings of the market.
One of the biggest difficulties in equity investing is WHEN to invest? Apart from the other big question WHERE to invest? While, investing in a mutual fund solves the issue of where to invest, SIP helps us to overcome the problem of when to invest.
SIP involves disciplined investing irrespective of the state of the market as SIP investors buy even when the markets are low. When the markets are high, it may not be prudent to commit large sums at one go, thus balancing your portfolio. This makes timing the market less relevant, therefore reducing your worries about the state of your investments in volatile markets.
Mutual Funds allow us to invest very small amounts (starting from Rs. 100/-) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our finances. SIP, therefore, becomes one of the ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market. Large investors who wish to accumulate their savings prudently might opt for a larger SIP amount.
However, do your research before starting an SIP in a mutual fund. Never select a fund merely on rankings and ratings. While investing, have a long term approach and select the fund whose investment objective matches your financial goals and needs. Never forget to look at the portfolio of the fund. If all the criteria’s are satisfied than you can start an SIP of desired amount in that fund.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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