An Investment Approach to Help you Achieve your Financial Goal
Written on Friday, August 19, 2016
By Navneet Kumar Dubey
More often people are afraid of market situations, so, if you don’t want to get in to the trap, take SIP route, where a fixed sum is invested for a fixed time period, which is actually the time period of your financial goal. Most of the time, we are reluctant to invest heavy amount, but if we route our investment on a regular basis, we need not to invest a very big amount but instead, small amounts invested regularly will help you to achieve your financial goals of life and the best way to achieve it do systematic investment planning for a longer time period. Let us understand the concept of SIP (systematic investment plan).
What is a systematic Investment Plan (SIP)?
SIP enables you to invest over the longer time period, reducing the risk of market volatility and helps you to build a portfolio, which can be utilized to achieve your financial goal. SIP can be linked to any of the goals whether it is child’s education, wedding planning, overseas vacation, car purchase, retirement planning or house purchase.
Working Concept of SIP
Once you have identified the recommended solution through financial planning you can easily start a SIP, all you have to do is to give a cheque, with relevant details for the amount you want to invest. You will be allotted fund units at every regular interval of time. There is a least risk of timing the market while your investments are going through the rough edges of the market.
Rupee Cost Averaging:
Investing in SIP enables an investor to take part in the stock markets without actively timing them and he/she can benefit by buying more units when the price falls and less units when the price rises. This scheme helps reduce the average cost per unit of investment through a method called Rupee Cost Averaging.
Average NAV => (175/10) = 17.5
For Example - Someone who has been investing Rs.1000 for ten months in SIP, in that case we will find out the actual average purchase cost of the asset which is lower than the average NAV of his investment over 10 months, which actually is termed as a benefit of Rupee Cost Averaging.
Actual average purchase cost per SIP => (10 months * 1000 investment) / 696 (unit purchased) = 14.36.
The magic of SIPs going through rupee cost averaging translates into a win-win situation for the investor. If markets fall, you get to buy more units at a minimum price. On the other hand, if the markets rise, the value of your investment goes up. Keeping in mind that SIPs work best if you continue investing when the market is going through a rough patch. If you stop investing when markets are down, you lose the advantage of buying at cheaper cost.
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. As SIP is a hassle-free mode of investment. By opting for the Electronic Clearance System (ECS), you can make recurring payment automatically 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. Your ECS can be even quarterly weekly or daily too.
Power of compounding:
To be a successful investor you need to follow a basic rule which is to start investing early. Since all investment and returns are based on the power of compounding, an investor starting out early can earn much higher returns than a one starting out late even with a slightly higher corpus. Since, a Systematic Investment Plan does not seek a large amount of investment and users can start investing with a low sum each month depending on their financial condition, it allows them to start investing much early in life.
If you started investing Rs.10000 a month when you turn 40, in 20 years’ time you would have invested overall Rs.24 lakhs. If that investment grew by an average of 15% a year, it would be worth Rs.1.5Cr when you reach 60 years of your age.
However, if you started investing 10 years earlier, your Rs.10000 each month would add up to Rs.36 lakhs over 30 years. Assuming the same average annual growth of 15%, you would have Rs.7 Cr on your retirement at 60years of age - more than double the amount you would have received if you had started ten years later!
It 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 in lump sum. For a salaried employee, SIP offers the opportunity to invest systematically and build the wealth over time and achieve their long term financial goals of life.
It's not necessary to time the market :
Timing of the market is an attempt to predict the movements in the market using fundamental and technical analysis. Basically, there is a concept of selling and buying in investing is buy low-sell high. Most of the investors who try to time the market tend to do exactly the opposite.
Align your financial goals through SIP:
You can easily link any financial goal with existing SIP and get it accomplished as per the requirement and necessity of your goal demands. Eventually, this will help you to construct your portfolio in a goal based manner.
Goal based financial planning helps you to achieve your needs and wants on time. The only think you need to do is to review your funds’ performance, which are linked with your goals so that you can achieve it, as SIP works on the principle of regular investment you need to focus on your progress of goals which are linked with investments. This way SIP becomes the beneficial & best way to achieve your financial goals of life.