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Essence of Systematic Investment Plan

In the last few days, investors in the stock markets have seen it all. From the Sensex highs of 21,000 to the steep fall to 15,700 in and the complete U-turn the markets took to recover. An investor who was convinced that the bear market was on and sold off his holdings would be a poor, wise man today.

Similarly, a person would waited for the markets to bottom out before buying stocks would have missed out the opportunity to buy stocks at lower valuations. Probably, the only investor who has benefited by the quick fall and subsequent rise of the markets is a systematic investment plan (SIP) investor. SIP is a simple, tried and tested strategy designed to help in investors' wealth creation in a disciplined manner over the long term.

A disciplined approach to investing will provide you with these benefits:

1) Power of compounding
2) Makes market timing Irrelevant
3) Rupee cost Averaging
4) Convenience

Power of compounding

Many investors delay investment decision-making, as they can be easily postponed. Such a delay, however, would prove expensive in the long run. The power of compounding underlines the importance of making your money work for you at an early age. An individual starting at age 25, having 35 years till retirement, would need to save only Rs 6,985 per month (at an interest rate of six percent) to make a crore of rupees on retirement. An individual who starts saving at age 35, having only 25 years to retirement would have to invest Rs 14,359 per month to reach a crore. As shown in the example, you would be surprised what you could achieve by saving a small sum of money regularly from an early age. The earlier you invest, the longer your money works for you and greater will be the power of compounding.

Rupee cost averaging

Investing would be simple if you could always pick the best time to buy and sell. Most are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least five years). They are also an effective tool to counter inflation. However, timing the market consistently can be a difficult task and you could be making negative returns sooner or later. What you need is an automatic market-timing mechanism like rupee cost averaging (RCA) that eliminates the need to time your investments. With RCA, you simply invest a fixed amount at regular intervals, regardless of the NAV of a mutual fund. The idea is that you buy fewer units when the NAV is high and more when it is low - automatically. This is in line with your natural desire to buy low and sell high. For instance, you could opt for a systematic investment plan (SIP) by investing Rs 1,000 every month into an open-ended equity scheme with an NAV of Rs 10. The average cost per unit under the SIP will always be less than the average purchase price per unit, because each installment is made at different price point. RCA, however, does not guarantee a profit. But with a sensible and long-term investment approach, it can smoothen out the market ups and downs and reduce the risk of investing in volatile markets.

Convenience

If you are a professional with very little time for managing investments, SIP offers you a very economical and convenient method of being a part of the action in equity markets. You can enroll for the SIP by starting an account and providing postdated cheques of periodic investments (monthly, quarterly) based on your convenience with any mutual fund.

In a nutshell, SIP is an efficient and convenient vehicle to accumulate wealth in a time-bound and disciplined manner. So when is the best time to invest? This month, next month… every month, starting right now.

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