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Showing posts with label Systematic Investment Plan. Show all posts
Showing posts with label Systematic Investment Plan. Show all posts

Tuesday, September 21, 2010

SIP is a Boon for Small Investors

SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a mutual fund by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in mutual fund. Thus, you can invest in a mutual fund without altering your other financial liabilities. It is imperative to understand the concept of rupee cost averaging and the power of compounding to better appreciate the working of SIPs.

SIP has brought mutual funds within the reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, one-time investment.

While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years.

Even for the cash-rich, SIPs reduces the chance of investing at the wrong time and losing their sleep over a wrong investment decision. However, the true benefit of an SIP is derived by investing at lower levels. Other benefits include:

1. Discipline

The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundreds every month, rather than set aside a large sum for investing in one shot.

2. Power of compounding

Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. Let’s explain this with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a corpus of Rs 12.23 lakh while person B’s corpus was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-corpus. That difference is due to the effect of compounding. The longer the (compounding) period, the higher the returns.

Now, instead of investing Rs 10,000 each year, suppose A invested Rs 50,000 after every five years, starting at the age of 35. The total amount invested, thus remains the same - Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.

3. Rupee cost averaging

This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.

People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.

4. Convenience

This is a very convenient way of investing. One of the way is to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one’s account and will send the confirmation for the same. The most convinient option is to start SIP via your online trading account like ICICI direct, HDFC Securities, Sharekhan, India Infoline, Motilal Oswal etc. You simply select the mutual fund house and the scheme in which you want to start SIP, enter the investing amount, frequency (fortnightly, monthly or quaterly) and time period. Amount will get debited through ECS (electronic clearing service) based on the specified parameters defined by you.   

5. Other advantages

There are no entry or exit loads on SIP investments. Capital gains, wherever applicable, are taxed on a first-in, first-out basis.

Monthly investment of a fixed amount brings in discipline into your fiscal behaviour. Since the amount gets deducted from your bank account automatically, you do not even realise it. This inculcates a savings habit, forces you to save and brings in a regularity in your investment pattern and helps you in reaching financial goals in a painless manner.

Monday, August 2, 2010

The Power of Compounding

Compounding is a mathematical phenomenon that basically means the longer you stay invested - and reinvest your earnings - the faster your money will grow!

Therefore, the two important keys to taking advantage of the power of compound interest are:

1. Leaving your money invested in the markets for the long run and

2. Reinvesting your income and gains.

Most of us would like to have a million rupee cash at some point in our life. Most of us also work 40+ hours a week at our job. What little amount we save can and will accumulate over the years, but the odds of reaching the 1 million mark is relatively small.

However, if we take advantage of the power of compound interest, then we can begin realizing our 1 million goal.

For instance, let's say you decide to invest 100 per month in an investment that yields 6% interest compounded monthly, for the next 30 years.

In 30 years, you would have 100,451.50!

That's not too bad, considering you made 64,451.50 in interest.

Now, let's say you kept that up another 10 years ...

You would then have 199,149.06.

In 10 years, you almost double the value of your investment.

Monday, June 21, 2010

Systematic Investing for your Retirement

Systematic investing, also known as automatic investing, is the process of allocating a set amount of your income toward specific investments at regular intervals, such as weekly, biweekly or monthly. Rather than investing money whenever you have some extra cash, or setting aside whatever is left after paying your monthly bills, you put your future financial comfort first by automatically contributing to your retirement account.

When you invest automatically, you're more likely to succeed because you avoid the temptation to spend your extra cash. Instead, you put your money to work for your future — conveniently, regularly and automatically.

How to invest automatically?

It's easy to take advantage of a systematic investing plan. In fact, you most likely are already applying this strategy if you are participating in an employer-sponsored retirement plan or making regular investments into a mutual fund account. Here are several ways you can invest automatically and potentially boost your retirement assets:

Defined contribution plans: If you participate in your employer's retirement plan, you are taking advantage of systematic investing. These plans let you contribute a specific amount from each paycheck before taxes. And you can change the amount of your contribution at any time, up to the limit.

Payroll savings plan: If you don't have an employer-sponsored retirement plan, you can use this service to systematically invest in an annuity and build your retirement reserves. Most employers offer some type of payroll savings plan, which lets you automatically transfer money from your paycheck to a bank or investment account you specify.

Mutual fund accounts: Mutual funds generally offer two ways to invest automatically. First, most mutual fund companies offer a systematic investment plan, which lets you make regular contributions from your bank checking or savings account directly into your mutual fund account on a schedule you select. (Note that most systematic investment plans require a minimum monthly investment of Rs. 500 or Rs.1000) A second option is to elect to reinvest your dividend and capital gains distributions back into the fund rather than to receive them in cash. This means you systematically invest every time your fund makes a distribution.

Individual stocks: Similar to mutual funds, when you purchase individual stocks, you may have the opportunity to participate in a systematic investment plan and a dividend reinvestment program.

Annuities: When you purchase an annuity, you can systematically invest by making regular payments. Each payment is then proportionally allocated to the subaccounts you have selected.

Save while you invest

In addition to creating automatic discipline, systematic investing can also help you reduce your average cost per share if you apply a strategy called dollar-cost averaging. This strategy involves purchasing shares on a set schedule (weekly, monthly, quarterly), regardless of the market's short-term performance. This will result in the purchase of more shares when prices are low and fewer shares when prices are high. Over time, this may lower your average cost per share, as illustrated below, and help smooth out the effects of market volatility.

Regular Investing + A Sound Strategy = Success

Investing regularly and automatically is an ideal way to make your retirement fund a lifelong priority. But in addition to making a commitment to investing, you need to select investments that align with your goals, retirement timeframe and tolerance for risk. For example, you may want to consider investing in an actively managed portfolio that pursues a specific strategy or style, such as long-term capital appreciation or moderate growth, or in an account that pursues a particular goal by a target date that matches your expected retirement date.

Investing a set amount of money automatically and at regular intervals ensures a portion of your income always supports your long-term retirement goals. You can evaluate a variety of systematic investing strategies, as well as other options within the four cornerstones of your financial picture — cash and liabilities, investments, protection and taxes — so you can more confidently save toward your retirement dreams