Monday, 18 March 2019

When You Have a Systematic Plan, No Dream is Too Big

Posted by MyInvestmentsPub
(Published on 19-Mar-2019)
The primary objective of investing is to build wealth over the long-term. You may choose amongst various products such as debt, equity, mutual funds, fixed deposits, and many more. Each of these products has their pros and cons. Equities may deliver higher returns but are very risky. On the other hand, debt provides guaranteed but lower returns. Mutual funds offer you the option of investing in the stock market indirectly while protecting your investment. However, you may not have a huge lump sum to invest in these instruments. It is advisable to opt for a Systematic Investment Plan (SIP) to build wealth over the long-term.

Benefits With Systematic Investment Plan / SIP:

An SIP allows you to invest a small amount at regular intervals in your chosen funds. The amount is invested as per your choice, which may be monthly, quarterly, or yearly. Over the tenure, you are able to accumulate units in these funds to earn returns on your investments. 

Adopting systematic investing has several benefits that allow you to build a strong portfolio over the years. Here are four important advantages of investing in SIPs:

1. Rupee-cost averaging

Rupee-cost averaging, also known as RCA, is one of the biggest advantages of investing through systematic plans. When you opt for these plans, you invest a fixed amount at regular intervals in your chosen financial product. Therefore, when the price of the instrument is lower, you are able to purchase a higher number of units. Similarly, if the price increases, you are able to buy a lesser number of units. This reduces the overall purchase price over a period of time through RCA. In the long-term, rupee cost averaging evens out the market movements helping you maximize your gains. 

2. Financial discipline

To ensure you are able to meet your financial goals, it is crucial to adopt discipline and focus on your investments. When you opt for a systematic plan, a fixed amount is automatically debited from your account and invested in your chosen funds on the specified date. This encourages you to develop financial discipline with the convenience of investing smaller amounts to grow wealth over the long-term. You may set up an automatic debit facility through your bank account to ensure you do not miss on any due date. 

3. Power of compounding

When you invest in any financial instrument, it is recommended you begin early. This allows you to grow your wealth for a longer period thereby enabling you to achieve your financial objectives. With compounding, your returns earn additional income that is beneficial in accumulating a larger corpus over the long-term. With a systematic plan, you do not need to invest a huge amount. Therefore, you are able to start investing at an early age to maximize the power of compounding to build wealth. 

Here is an example to help you understand compounding:

Assume that you invest INR 10,000 per month when you are 30 years old. Over the next 20 years, you would have built a corpus of INR 2.4 crore assuming returns at 7% per year during this period.

Assume that your friend invests the same amount but begins investing 10 years earlier. In this case, the total amount would be INR 3.6 crore during the 30 years. Therefore, your friend is able to accumulate a significantly higher corpus because he started investing early through the power of compounding.

Conclusion

A systematic investment plan is a convenient and affordable way to start investing in building wealth over the long-term. You may invest with as less as INR 500 per month with these plans ensuring you do not have any financial difficulties. If you do not have the technical knowledge or the time to regularly monitor the market performance, a systematic plan is an excellent way to take exposure in such instruments. Systematic plans may also provide tax benefits, which make these highly efficient in building wealth due to high returns on investment over a longer investment tenure.

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