Wealth creation needs financial discipline and investing for the long-term. A Systematic Investment Plan (SIP) encourages discipline through regular savings ensuring you build wealth through periodic but small capital investments.
What is SIP?
A systematic investment plan allows you to invest in an organized manner in your choice of mutual funds (MFs). The pre-determined amount is invested at a regular interval in your chosen funds. Depending on the Net Asset Value (NAV), the amount is allocated to buy a certain number of units in the funds.
You may invest your money either monthly, quarterly, or at any other interval. You may either give post-dated checks or invest through the Electronic Clearing System (ECS) mode. These plans are beneficial if you do not have the technical expertise or do not have a large amount to invest at one time.
Here is how investing in SIPs with a small monthly amount helps you build wealth over the long-term.
The number of units purchased with the amount depends on the NAV of the chosen funds. Therefore, if the NAV is higher, you will be able to purchase a lesser number of units and vice versa.
This allows you to overcome the market volatility in a profitable manner through automatic buying of a lesser or higher number of units based on the NAV. This helps you to reduce the overall cost of the total number of units held in the chosen funds through rupee-cost averaging.
You may invest in a systematic plan with an amount as low as INR 500 per month. Moreover, you are able to choose the investment frequency while choosing the amount you want to invest. When you regularly invest a small amount in your chosen funds, you are able to reduce your financial burden, thereby ensuring you are able to build wealth over the long-term through less daunting periodic investments. You are able to even out market movements and take advantage of investment opportunities offered by such volatility without trying to time the market correctly.
Power of Compounding:
The power of compounding is like a tumbling snowball. A small snowball when rolled down a hill constantly picks up more snow as it rolls down growing larger. The snowball effect is metaphoric for the power of compounding.
With compounding, the returns on your investments are calculated on the total accumulated amount at the end of the year. Because your returns earn additional income, you are able to grow your money over a longer period of time. An investment in a systematic plan allows your capital to build wealth through the power of compounding working as the catalyst.
Recommended Read: Setting Financial Goals to Convert Dreams into Reality
Here are three variants of systematic plans to help build over the long-term:
You may increase the investment amount as your income rises over a period of time. Therefore, you are able to invest more as time progresses. This will help you create wealth when you stay invested for the long-term.
With a regular systematic plan, a fixed amount is invested in your chosen funds. However, when you opt for the value plan, the investment amount depends on the value of the underlying variable, which may be the NAV or the price-equity movement of the benchmark.
Based on your liquidity, the investment amount varies from one time to another. It is generally, a lump sum, which is invested like a systematic plan with the only difference being that the amount may vary each month. This allows you to take advantage of market opportunities.
Systematic plans help average the market ups and downs ensuring your investment decisions are not based on your emotions.