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Last Updated : May 06, 2016 04:26 PM IST | Source: Moneycontrol.com

Why SIPs are the route to your financial goals

Systematic investment plans makes you save regularly and enjoy benefits of rupee cost averaging. This makes money grow over a period of time.

Rajiv Raj

Each of us dreams to live in our own house, have a comfortable retirement, provide better amenities and education to our children and see them settled in their lives with their spouses. To ensure that our dreams are fulfilled, we need to take care of our finances prudently. More and more people are now coming out of their comfort zones and looking for more risk more return investment options, aside from regular savings and fixed deposits.

Mr. Kaushik dreams of sending his only son to study in foreign university. Current value of the course is Rs 15 lakh and if we assume inflation at 9%, the future cost of the course over next 17 years will be around 65 lakh. If expected equity mutual fund return is 13%, then Mr. Kaushik needs to invest approximately INR 8,800 approximately every month in an equity mutual fund starting now.

Systematic Investment Plans (SIP) of mutual funds has become a very popular investment route nowadays, as more and more retail investors are realizing the benefits of having regular and systematically planned approach to investment, for achieving their financial goals. A mutual fund SIP allows you to invest as less as INR 500 per month to enjoy the benefits of markets. Here is how taking the SIP route can get you closer to your financial goals.

SIP gives you flexibility

SIP gives you the flexibility to invest as little as INR 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.

SIP induces discipline

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. By opting for the Electronic Clearance System (ECS), you can make recurring payment 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.

SIP gives you the benefit of rupee cost averaging

Equity market is volatile. It is extremely difficult to time the market. But, when you are investing in the market via mutual fund SIP, you no longer need to worry about the market fluctuations. When you are investing a fixed amount in a systematic manner, you will get more units of mutual fund when the price is low and fewer units when the market is on high. In the long term it averages out the cost of your investment. As such it lessens the impact of short term market volatility on your investment.

SIP gives you the power of compounding

Albert Einstein was right when he declared compound interest as the eighth wonder of the world. The compound interest allows you to build a large corpus overtime when you reinvest the interest you have earned on your investment. Investing in the SIP early can help you in maximizing your return as well as wealth. Mr. Kaushik started investing INR 2,000 per month at the age of 35. His friend Mr. Verma also started investing the same amount at the age of 30. Assuming that the retirement age is 60 years and annual return rate is 13%, by the time they are retired, Mr. Kaushik will have INR 45 lakh as corpus. On the other hand Mr. Verma, who started just 5 years earlier, will have a whopping amount of roughly INR 88 lakh. Therefore, start investing as early as possible to build your wealth through SIP.
First Published on May 6, 2016 04:26 pm