Systematic
Investment Plan (SIP) is a smart financial planning tool that helps you
to create wealth, by investing small sums of money every month, over a
period of time. Investing at an early stage of life lets you enjoy the
benefits of two powerful strategies, rupee cost averaging and the power
of compounding.
How SIP works?
SIP is a method of investing a fixed sum, regularly, in a mutual
fund scheme. SIP allows one to buy units on a given date each month, so
that one can implement a saving plan for themselves. An SIP is generally
preferred for an equity scheme and can be started with as small as Rs
500 per month.
The biggest advantage of SIP is that one need not time the market. In
timing the market, one can miss the larger rally and may stay out while
markets were doing well or may enter at a wrong time when either
valuation have peaked or markets are on the verge of declining. Rather
than timing the market, investing every month will ensure that one is
invested at the high and the low, and make the best out of an
opportunity that could be tough to predict in advance. SIPs thus make
the volatility in the market work in favour of an investor and help in
averaging out the cost called “Rupee Cost Averaging”. For example, with
Rs 1000 one can buy 50 units at Rs 20 per unit or 100 units at Rs.10 per
unit depending upon whether the market is up or down. Thus, more units
are purchased when a schemes’ NAV is low and fewer units when the NAV is
high. Hence, when the two cases are taken together, cost is averaged
out. The longer the time-frame, the larger are the benefits of
averaging.
SIPs also help in availing benefits of compounding. This means the
earlier one starts an SIP and longer the investment horizon, the larger
the benefits. The reason being, each rupee one invests earns a return,
which ends up as more rupees to earn a return, allowing investment to
grow at a fast pace. Higher rates of return or longer investment time
periods increase the principal amount in geometric proportions. This is
the single most important reason for investors to start investing early
and keep on investing on a regular basis to achieve the long-term
financial goals.
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