The power of Systematic Investment Plan (S.I.P)

As explained in my article ‘Planning financial goals’, a goal can be any target that needs to be achieved in a stipulated period. I have also explained different types of financial goals like, buying a flat, children’s education, marriage or retirement living expenses. All of these are critical long term goals in your life. These goals need to be achieved in a disciplined and systematic manner. When I say systematic, I mean investing a fixed sum of money each week, month or year to achieve the targeted financial goal. In this article let me make you understand the different advantages of SIP investing. SIP as everyone knows is Systematic Investment Plan. Generally SIP relates to investing a fixed sum of money each month in mutual fund scheme. The rupee cost averaging and the power of compounding are two main advantages of SIP investments.

Rupee Cost averaging: If you wanted to buy units of a mutual fund you end up purchasing more units when the net asset values of the units are down, and vice versa. Here, it is the average purchase price that matters and not the purchase price of one unit as you will keep on purchasing each month on a particular date. The returns are based on this average cost. This way you average the cost of your purchase and sell the units in future to achieve your financial goal. This helps in negating the volatility in the markets.

Power of compounding: It refers to returns earned on the principal as well as the interest amount unlike simple interest where you earn returns only on the principal amount. It also rewards investing at regular intervals and works best over long tenures. The larger the tenure of investment, more are the returns. Also, the earlier you start to invest, the more you benefit. For instance, if you begin investing at age 30 and invest Rs.10,000 a year for the next 10 years at 9 per cent per annum, and roll over the proceeds until you’re 60, you’ll end up accumulating Rs 9.28 lakh (your total investment only Rs 1 lakh). On the other hand, if you begin saving at age 40 and invest Rs 10,000 a year for 20 years at 9 per cent a year, you will end up accumulating Rs. 5.58 lakh (your total investment of Rs 2 lakh). This means that by keeping your money invested longer, you can get the benefit of compounding and can become richer by Rs 3.70 lakh (if you start investing from age 30), although your principal investment was just half of what you would invest by starting at age 40.
Take a lesson from the above example and start saving as soon as possible. Remember, you will have to fulfill many goals in future for which you will have to start investing systematically from now.