Shape your wealth through SIP
Whichever way you choose to invest your money to create wealth, one thing is for sure, the sooner you start the better off you will be. Once your investment returns start compounding year after year, you will really start to see the effect it has on your wealth creation activities.
Uncertainty is the basic nature of stock markets. Time and again, the markets have proved investors wrong by showing their unpredictable nature. This impact is most crushing on retail investors. Is it possible to ride on the stock market volatility, without getting hurt? Yes, it is! For this two simple principles need to be followed religiously.
1: Stay invested for long term.
2: Adopt a systematic and regular approach towards investment.
SIP in mutual funds is one approach which lets the investors follow the two basic principles of investing at one go.
Benefits of SIP
- Monthly contribution: Investing at one go proves to be a burden on the pockets of investors. On the other hand, monthly investment in small amounts is more feasible for them. SIP provides this benefit to retail investors, wherein they can invest a part of their monthly savings regularly. The initial investment amount may be as low as Rs.500.
- Systematic approach: SIP helps in investing consistently in a disciplined manner and further it helps in compounding returns as well.
- Rupee-cost averaging: Any market witnesses ups and downs over a period. The best investment approach to be followed in such cases is a SIP. Here, irrespective of the NAV movement an investor acquires more units compared to a one time investor. Successively, this means higher gains. The following table illustrates the same.
|Month||NAV (Rs.)||Amount invested in SIP (Rs.)||Units allotted||Amount invested in lump sum||Units allotted in lump sum investment|
SIP approach lets the investor to buy more units when the prices are low, thereby bringing down the average cost for the investors.
- Timing the market approach : Consider three cases. Sehwag invests Rs.5,000 at the index level on the first day of every month. Dhoni, being lucky, invests the same amount at the lowest value of the index every month; and Kaif, unfortunately invests the same amount but at the highest level of the index during that month.
|Investment made||Sehwag (indifferent)||Dhoni (most lucky)||Kaif (unlucky)|
|BSE Sensex returns||11.42%||11.34%||9.93%|
Note: An investment of Rs.5,000 is made monthly for a period of 5 years (July’12 to June’17). Returns are XIRR of investments.
The returns in the above three cases differ by a very small margin, showing that while investing for long term, it doesn’t really matter whether you are investing at market peaks or market lows.
Hence time in the market is more important than timing the market. Investing through SIP frees you from timing the market because over a long horizon, SIP investment evens out the market ups and downs.
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