Why SIPs make money for you

Systematic investment plans combine flexibility, discipline, cost averaging and power of compounding to help you achieve your financial goals

Each of us dream to live in our own house, have a comfortable retirement, provide better amenities and education to our children and see them settled in their lives with their spouses. To ensure that our dreams are fulfilled, we need to take care of our finances prudently. More and more people are now coming out of their comfort zones and looking for more-risk-more-return investment options, aside from regular savings and fixed deposits.

Rajesh Kaushik dreams of sending his only son to study in foreign university. Based on the current value of the course, in next 17 years he is expected to save an amount of Rs 50 lakh approximately for the course. Considering the annual inflation of 7 per cent and expected equity mutual fund return of 13 per cent, Rajesh Kaushik needs to invest Rs 6,500 approximately every month on an equity mutual fund starting from now.

Systematic Investment Plans (SIP) of mutual funds has become a very popular investment route nowadays, as more and more retail investors are realising the benefits of having regular and systematically planned approach to investment, for achieving their financial goals. A mutual fund SIP allows you to invest as less as Rs 500 per month to enjoy the benefits of market appreciation.

Here is how taking the SIP route can get you closer to your financial goals.

1. SIP gives you flexibility

SIP gives you the flexibility to invest as little as Rs 500 every month and build your corpus. It is an excellent vehicle for retail investors who do not have the luxury to invest a large amount at one go or at regular time periods. For a salaried employee, SIP offers the opportunity to invest systematically and build the wealth over time.

2. SIP induces discipline

When you set to achieve your financial goal, it is important to be disciplined about your savings and investments. Not everyone is good with managing their money carefully, month after month. By opting for the electronic clearance system (ECS), you can make recurring payment towards your mutual fund SIP every month.

This will help you in taking better control of your money and will induce the habit of investing every month.

3. SIP gives you the benefit of rupee cost averaging

Equity market is volatile. It is extremely difficult to correctly time the market. But, when you are investing in the market via mutual fund SIP, you no longer need to worry about the market fluctuations.

When you are investing a fixed amount in a systematic manner, you will get more units of mutual fund when the price is low and fewer units when the market is on high.

In the long term it averages out the cost of your investment. As such it reduces the impact of short term market volatility on your investment.

4. SIP gives you the power of compounding

Albert Einstein was right when he declared compound interest as the eighth wonder of the world. The compound interest allows you to build a large corpus overtime when you reinvest the interest you have earned on your investment.

Investing in the SIP early can help you in maximising your return as well as wealth.

Rajesh Kaushik started investing Rs 2,000 per month every year at the age of 35. His friend Rakesh Verma also started investing the same amount at the age of 30. Assuming that the retirement age is 60 years and annual return rate is 13 per cent, by the time they are retired, Rajesh Kaushik will have Rs 42 lakh as corpus.

On the other hand Rakesh Verma, who started just 5 years earlier, will have a whopping amount of roughly Rs 80 lakh. Therefore, start investing as early as possible to build your wealth through SIP.

Illustration: Dominic Xavier/Rediff.com

The author is Co-founder and Director Credit Vidya.