GATEWAY TO WEALTH CREATION: SIP
Ask any Financial Planner or Financial Expert or Investment Manager the secret for creating wealth in the long term and the mantra he would advise is regular, disciplined savings in a carefully chosen basket of investments that suits your risk profile. Shorn of jargon, what this means is a systematic investment plan (SIP) in a good mutual fund can create wealth in the long term.
Mantra to Get Richer is:
+ Invest Regularly = Create Wealth
WHAT IS SYSTEMATIC INVESTMENT PLAN (SIP)?
Systematic Investment Plan (SIP) is a financial planning tool that helps you to create wealth, by investing small sums of money every month, over a period of time. A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors invest regularly in a disciplined manner.
Why SIP is the BEST solution?
- Disciplined approach to investments
- No need to time the market.
- Harness the power of two powerful Investment strategies:
- Rupee Cost Averaging – Benefit from Volatility
- Power of Compounding – Small investments create Big Kitty over time
- Lighter on the wallet
- Reap benefits of starting early
How does Power of “Compounding” works?
An inspirational story.
Long back, when the inventor of the chess showed the game to an Indian king, the king was so impressed by the new game, that he wanted to reward the inventor. At that time, the inventor replied, “My wishes are simple. I only wish for one grain of rice for the first square of the chessboard, two grains for the second square, four grains for the third square, eight for the fourth square and so on for all 64 squares.”
The inventor said, “Please double the number of grains in the next square compared to the earlier square.”
The king was amazed to hear that the investor had asked for such a small reward. He happily agreed to the inventor’s request. However after a week, the king’s treasurer informed him that the reward would add up to a huge number—far greater than all the rice that could possibly be produced in many centuries!
Do you know how much rice it would be when one reaches 64th square of the chessboard?
As said earlier, in the first square of the chessboard there is only one grain. But when you come to the 64th square, it is 18 million trillion grains of rice. This is more than enough to cover the entire surface of the earth.
All of us behave like the king in some ways or the other. We find it hard to understand how the ‘power of doubling or compounding’ makes numbers grow.
Average out your cost of investment and hence reduce your risk
Let’s say you invested Rs. 1000 every month and let’s assume the scheme you invested in is available at a unit value of Rs. 20 per unit. Then in month 1, you will be able to obtain 50 units. In month 2, if the unit value goes down to Rs. 10 then you will be able to obtain 100 units.
Hence for Rs. 2000 invested over 2 months, the total value of your investment at the end of 2 months is Rs. 1500. However, if you had invested a straight sum of Rs. 2000 in month 1 when the unit value was Rs. 20 per unit – your net value at the end of month 2 will only be Rs. 1000.
Hence a SIP helps you average out your cost and thereby reduce risk resulting in generating better returns
Features of SIP
- Periodic Investing– Investor can choose different periods varying from –Daily, weekly, bimonthly or monthly. However as per market data 95% of investors have done SIP with monthly contributions.
- Auto debit– There is no need to issue payment every month in SIP. One has to give direct debit mandate to Mutual fund company or post-dated cheques and bank account get debited on the dates selected by the investor.
- Flexibility – One can close SIP any time as per convenience. For this simple communication has to be made to Mutual fund company.
- Investment– Investment can be made in Equity or debt mutual fund and has to be decided at the start if SIP.
- Maximum duration of SIP– SIP can be of any duration. One can also choose perpetual SIP, where one can invest on a periodic basis till communication to stop investment by the investor to mutual fund house.
Benefits of SIP
As common investor doesn’t have enough time and resources, SIP proves to be a viable option for them. Some important benefits are as follows:
- Reduces Risk because of Rupee Cost Averaging
- SIP can be started with very small amount of money
- Timing the market is not necessary
- Long term financial goal can be aligned with SIP
- Disciplined approach towards Investment helps in controlling the emotions
Secrets of Achieving Much More with SIP’s
- List down your dreams and goals and work out a plan to achieve them through SIP
- Ascertain the monthly/quarterly SIP required to achieve your goals
- Identify the scheme(s) in which you would like to invest and complete the formalities for SIP investment including forms and cheques
- Invest for the long term as the twin benefits of power of compounding and rupee-cost averaging work through different market cycles
- Diversify your investments for your dreams through multiple SIPs in different schemes to optimise returns as per your needs.
Frequency & Minimum SIP Amount
There are various frequencies to be choose depending on your requirement such as Quarterly, Monthly, Weekly etc.
Most popular intervals chosen by 95% of the investors is monthly investing. This is an easy way to create bigger wealth with small regular contributions, on a long terms per your needs.
Previous Performance of some SIP’s
Following is previous performance of some funds. SIP value as on 31.07.2016 with SIP of Rs. 10,000/- per month.
|Starting – August Month of||2015||2013||2011||2006||2001|
|Name of Scheme|
|Birla Sun Life Frontline Equity Fund||1,35,862||4,67,589||9,59,694||27,10,743||–|
|DSP BlackRock Opportunities Fund||1,39,592||4,94,404||9,99,068||26,42,830||104,31,738|
|Franklin India Bluechip Fund||1,33,786||4,56,228||8,87,564||24,29,099||90,30,336|
|SBI Magnum Multiplier Fund||1,33,321||4,87,039||10,09,264||26,67,270||1,11,38,939|
This article is for information purpose. This has not to be considered as investment advisory. Please contact your financial investment adviser before investment. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISK. PLEASE READ THE SCHEME RELATED OFFER DOCUMENT BEFORE INVESTING.
Name: WealthMaxi Financial Consultancy Private Limited
Address: Plot No. H-52, Block-H, Main Market, Shakarpur, New Delhi – 110092
Telephone: 011-64621378, 011-43027847
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