"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." — Robert G. Allen
This above statement is quite bitter but true. Today, one must diversify their investment plans or it is very likely that the individual cannot enjoy financial freedom which everybody craves for. Speaking of which, there has been a prolific rise of investors who are taking part in the share market over the last 5 years. Now we will answer one question first.
Why is the Systematic Investment Plan (SIP) considered to be one of the best ways to invest?
The simple answer would be the number of benefits an investor can reap without any high risk or vulnerabilities when it comes to trading ourselves. Another key factor which is paramount for success is the principle of compounding. Here, SIP allows investors to contribute a fixed amount at regular intervals, typically monthly, wherein, this disciplined approach helps in cultivating a savings habit and eliminates the need for market timing, as investments are made consistently over time.
In today’s volatile market, people often complain about not being able to save money. So understanding how SIP works can be a game changer. By choosing the SIP route, you get to invest in regular intervals every month, which will automatically translate into savings before you spend your money. Slowly but steadily, it brings financial discipline and also helps in realizing the returns later.
Start With Small Amounts
When it comes to investing in SIPs, an individual can get started with mere Rs. 500 a month. So, even a low-salaried individual can also participate. Furthermore, one great advantage of investing in SIP plans is that you don’t have to stress about the time factor and investments. When the stock market is extremely high, with the same amount, you will be allotted lesser shares and vice versa. So, the averaging works and your portfolio will be well-balanced at the end of the day.
"The individual investor should act consistently as an investor and not as a speculator." — Ben Graham
Grab The Benefit Of Compounding
When you invest in a SIP, the monthly returns derived from the SIP will be reinvested in your investment amount until maturity. So, with time your investment amount is exposed to the impact of compounding and helps you with exponential growth. Furthermore, the majority of the SIPs do not charge any penalty or fine if you want to stop the plan at any point. All you have to do is to go to your Demat account and opt out of the plan. This is one advantage that traditional investments like Fixed Deposits/Recurring Deposits do not provide.
Also one important thing to note is that sometimes, whatever reason it might be, you might not have enough funds in your bank account that can be used for investing in SIP. Don’t worry, unlike an RD or an FD, SIPs allow you to skip a month without any charges or fines. You can come back later and keep investing as you did every month.
In addition, if you got promoted or started realizing more disposable income every month, you can choose to start another SIP plan in different mutual funds that invest in other sectors or industries. This way, you can diversify your investments and start investing your extra money and make a decent return on it.
Do Not Mix Investments And Emotions
Having said all of that, one of the most important aspects of investing in the stock market is never letting emotions take over your investment decisions. The stock market, by principle, fluctuates continuously. So one needs to understand this, so as to not make any impulsive decisions based on the point performance of the market. This is another area where SIPs make a lot of difference. By bringing discipline into the investment approach, you can help yourself not react to the short-term volatility of the markets.
Now let’s take for instance, the people who had invested in mutual funds 15 years ago are now reaping significant returns. For instance, let’s say you started a SIP of ₹3000 per month in HDFC Top 200 in 1999. In a 15-year period (2014), you would have spent a total of around ₹5.4 lakh. At the same time, your investment would be worth almost a whopping ₹35 lakh! Let’s take the same SIP amount in Franklin India Prima Plus. Again, you would have spent a total of ₹5.4 lakh. Your investment’s worth in 15 years would be nearly ₹31 lakh!
Systematic investment plans or SIPs shield you from many harms. Some of them are short-term risks, short-term volatility, emotional and impulsive reactions, overspending, and so on. So to say, SIP plans are one of the safest and most convenient ways to invest in the equity markets of India through mutual funds. Learn more about SIP here. It is no surprise then to see the number of people opting to invest using SIP plans increase so much.
Furthermore, SIPs follow the principle of rupee cost averaging. When the market is up, you buy fewer units, and when the market is down, you buy more units. Over time, this helps in reducing the average cost per unit, mitigating the impact of market volatility. SIPs is also known for its flexibility where investors can choose the amount to be invested and the frequency of investments based on their financial goals and risk tolerance. This flexibility makes it suitable for both conservative and aggressive investors.
Additionally, SIPs are often associated with mutual funds, where professional fund managers manage the investment portfolio. This expertise can be beneficial for investors who may not have the time or knowledge to manage their investments actively.
Now let’s delve more into the Principle of Compounding:
Compounding is a powerful concept in finance, and SIP takes full advantage of it. Compounding involves earning returns not just on the initial investment but also on the accumulated interest or returns over time. Here's how it works in SIP: In SIP, you consistently invest a fixed amount at regular intervals. Each investment adds to the overall corpus. When we talk about compounding, time is the biggest factor that will affect it. So, The longer your money is invested, the longer it has to compound. Over time, the returns generated on your initial investment start earning returns themselves.
"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." — Paul Samuelson
If we further speak of compounding, we can look at say it is a kind of a snowball. As your investments grow, the compounding effect snowballs. The larger your investment, the more significant the returns generated, creating a compounding growth curve. Furthermore, with the compounding effect, even moderate returns can lead to substantial wealth creation over the long term. This is especially beneficial for long-term financial goals like retirement or education planning.
Key Takeaways:
SIP is one of the best forms of disciplined investment, which should be done consistently over a period of time. An investor may diversify their portfolio by starting a SIP in two or more funds. Investments in certain funds are eligible for deduction from taxable income under Section 80C of the Income Tax Act. One can save tax each year by investing in a SIP. For getting compounding benefits, it is important to hold investments for an extended period. Start investing at an early stage of life. Remember, Rome was not built in a day, and Warren Buffet accumulated 99% of his fortune only after the age of 50.
