Skip to main content

Systematic investment plan and power of compounding

The power of compounding is one of those effects in anyone's portfolio that financial planners swear by. That's because, to realize the true potential of a long-term investment, you need to have compounding on your side. A person should always keep in mind while investing that compounding amplifies the growth of the working money. Just like investing maximizes your earning potential, compounding maximizes the earning potential of your investments.

But remember, because time and reinvesting make compounding work, you must keep your hands off the principal and the interest earned on that. They often say that it's not the timing of investment but the time in investments that creates great wealth.

It is surprising to know that an eye popping 99% of wealth created by Warren Buffett, the celebrated investor and one of world's richest persons, was earned after his 50th birthday. Buffett made $62.7 billion of his $63.3 billion net worth after his 50th birthday. Such robust wealth in his 50s was created due to the magic of compounding in his investments.Buffet had started investing at a very early age and reaped the benefits of compounding over years.

A   (SIP) in a mutual fund is an effective means to beat market volatility and benefit from the enormous power of compounding over time. An SIP allows you to invest in any mutual fund by making smaller periodic investments instead of a lump sum, one-time investment. Since this is small money flowing out at regular intervals, it doesn't affect your other financial commitments significantly.Rupee cost-averaging is another benefit investors can reap from a disciplined SIP. Investing a fixed amount in a fund at regular intervals over time gets you more units when the price is lower, and the average cost per unit comes down.

The other advantage of investing through the mutual fund route is the higher expected rate of return compared to most other investments.To understand the role of returns, let us assume early investments of Rs 60,000 in each fixed deposits and mutual funds (market linked products). The table `Choose The Right Avenue' illustrates the returns from each. It shows not only that higher returns help create a much larger corpus, but also conveys that the more you stay invested, the bigger the corpus will be.

Understand the risks involved However, there is a word of caution.Several investors opt for aggressive investment products that may give higher returns, but they also come with higher risk. They feel an aggressive portfolio will lead to wealth creation in shorter duration, which is not always true. It is also recommended to understand your risk appetite by undergoing a risk profile test and then take an investment decision.

Despite the advantages, investors, however, do not always reap the benefits of compounding. There are two main reasons for the same.Moving in and out of investments frequently cancels much of the benefits of compounding. Frequent churning would be akin to 'taking two steps forward and one step back'.

The other is choosing only low return investments and restricting yourself purely to them for your long term savings. This will rob you of the famed 'multiplier effect'.

Popular posts from this blog

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

WEALTH TAX

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 WEALTH TAX   WHAT CONSTITUTES WEALTH? For wealth tax purposes, "wealth" means property , urban land, car, jewellery , yacht, boat, aircraft and cash in hand in excess of Rs 50,000. CAUTION POINT | Do not think you will have an easy escape from wealth tax by transferring your `wealth' without consideration to your spouse or minor child. Such assets will also be considered as your wealth. HOW TO DETERMINE YOUR TAXABLE WEALTH Add the taxable value of the above assets (computed as per the detailed rules for valuation) owned by you as on March 31 (for FY 2014-15, it will be March 31, 2015). In case you sold your car during the year, it will not be taxable wealth. Deduct loans if any obtained by you to acquire any of the taxable assets from the value of gross tax out for at least 300 days in a...

Equity Savings Fund

Invest Equity Savings Fund Online   The best part about these funds is that they are subject to equity fund taxation and at the same time are structured like MIP like funds . This new category, equity savings funds , offer a little of everything. They allocate money to equities & equity related instruments, and fixed income. They aim to generate returns by diversification. Such funds invest in fixed income and arbitrage to protect the investors from short term volatility and equity for capital gains. The best part of these funds is that they are subject to equity fund taxation and at the same time are structured like MIP funds.   MIP funds however are subject to debt fund taxation. Investors Equity savings funds are suitable for the following: First time investors who seek partial exposure to equity with less volatility and greater stability Investors seeking moderate capital appreciation with relatively lower risk Those wh...

How to Pick Top Performing Mutual Fund Schemes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to Pick Performing Schemes  Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts   The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they bo...

8% Government of India Bonds quick guide

For those seeking comfort in safety of returns, the Government of India issued 8% savings bond once again comes to the fore. First launched in 2003, these bonds are issued by the government with a maturity of 6 years. The bonds are available at all times with specified distributors through whom you can apply to invest in them. Here is a quick guide to what the bond offers and its features to ascertain to check for suitability. What are Government of India bonds Government of India bonds are like any other government bonds with specified rate of interest. The rate is fixed at 8% per annum paid half yearly, or you can opt for cumulative payment of interest at the end of the tenure. You can buy these bonds from State Bank of India and its associates, other nationalized banks and some private sector banks such as HDFC Bank Ltd and ICICI Bank Ltd, among others. The bonds can be bought from the offices of Stock Holding Corporation of India as well. They are available in physical form onl...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now