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Invest Regularly, Reap Big Rewards: The Advantages of SIP Investing
Investing is not as difficult as it seems. With the help of the latest technological developments, investing has become better and more manageable. In this article, we will learn about a similar feature called Systematic Investment Plan.
People are worried about finding the right instrument to put their money on, but that is only half the battle won. The actual difference comes when you buy that instrument. Many people get afraid when they see only red symbols on the ticker tape and think about holding on to their cash until the market recovers.
Sounds familiar?
It may have happened to you, and you must have stopped buying the stocks altogether.
But does it benefits you?
If you hold on to cash during the recession and invest it during the bull run, can you prevent yourself from making losses?
Theoretically, yes.
But that is the end of it.
You can’t implement this in real life. You do not know which ways the market moves. Is the opportunity for bottom fishing over, or will the so-called dip, dip again?
All these complexities are uncalled for, and you may be correct one or maybe two times, but you cannot do it for long. It’s just not viable. That is why there is a famous quote that says:
Time in the market is much more important than timing the market.
Let’s support our statements with an excerpt from The Psychology of Money:
Consider what would happen if you saved $1 every month from 1900 to 2019. You could invest that $1 into the U.S. stock market every month, rain or shine. It doesn't matter if economists are screaming about a looming recession or a new bear market. You just keep investing Let's call an investor who does this Sue. But maybe investing during a recession is too scary. So perhaps you invest your $1 in the stock market when the economy is not in a recession, sell everything when it's in a recession, save your monthly dollar in cash, and invest everything back into the stock market when the recession ends. We'll call this investor Jim. Or perhaps it takes a few months for a recession to scare you out, and then it takes a while to regain confidence before you get back in the market. You invest $1 in stocks when there's no recession, sell six months after a recession begins, and invest back six months after a recession ends. We'll call you Tom. How much money would these three investors end up with over time? Sue ends up with $435.551. Jim has $257,386. Tom $234,476. Sue wins by a mile. There were 1,428 months between 1900 and 2019. Just over 300 of them were during a recession. So by keeping her cool during just the 22% of the time the economy was in or near a recession, Sue ends up with almost three-quarters more money than Jim or Tom.
The above section may come across to you differently than intended. For starters, you might say that this calculation is for 119 years of duration. I am not going to survive for that long. And you are right.
The duration of this section is to provide you with a good picture of compounding. After 20-25 years of investing, the deviations would be less when compared to 5-6 years of investing, and you will get the same picture.
Secondly, this text is according to the US markets, but the stock market as a whole functions in a similar fashion. There are recessions in India, Germany, Britain, and many more countries. So, this strategy applies to most of the growing markets.
To allow investors to reap the same benefits, you are provided with the facility of Systematic Investment Plans.
What is SIP?
You can invest a small amount regularly in your favorite mutual fund scheme with a systematic investment plan, or SIP. By turning on a SIP, a certain sum is automatically taken out of your bank account each month and invested in the mutual fund of your choice.
With a SIP, your investment is spread out over time as opposed to a flat sum. As a result, you don’t need a sizable sum of money to begin investing in mutual funds through SIPs. When you invest through a SIP, you are compelled to set money aside regularly, which will help you develop financial discipline in the long run.
How Do SIPs Work?
When you make a SIP investment in a mutual fund scheme, you buy a specific number of fund units equal to your investment amount. While investing through a SIP, you can profit from both bullish and bearish market patterns, eliminating the need to time the markets.
You buy more fund units when the markets are down and fewer fund units when the markets are up. Since all mutual funds’ NAVs are revised every day, the price of purchase may change from one SIP installment to the next. The cost of purchases eventually averages out and ends on the lower end. It is known as rupee cost averaging. This benefit is not available when you invest in a lump sum.
Reasons Why SIP is the Best Way to Invest
- SIP Improves Your Investing And Savings Discipline: Individuals frequently lament their inability to save money. By selecting this SIP option, you will be able to make regular monthly investments that will automatically result in savings before you make purchases. It instills financial discipline gradually but surely and aids in future return realization.
- Start with modest sums: You can start investing with SIP for as little as INR 500 each month. You can still benefit from or participate in the expansion of the Indian stock market even if your earnings or savings are modest by choosing to invest in SIP plans in a variety of mutual funds. Now, you can even invest as low as INR 10 to buy the investment products. {Attach Navi Images}.
- Don’t Stress About Timing The Market: You don’t have to worry about timing the market and making the appropriate investments when you invest in SIP plans, which is a huge advantage. You will receive fewer shares for the same price when the stock market is extraordinarily high, and vice versa. Hence, averaging is effective, and at the end of the day, your portfolio will be well-balanced.
- Grab The Benefit Of Compounding: The profits received from your SIP investment will be reinvested in your original investment amount until maturity. Your investment quantity is thus exposed over time to the effects of compounding and aids in your exponential growth.
- Stop Anytime You Want: The majority of the SIPs do not charge any penalty or fine if you want to stop the plan at any point. All you have to do is to go to your Demat account and opt out of the plan. It is one advantage that traditional investments like Fixed Deposits/Recurring Deposits do not provide.
15-15-15 Rule: An SIP Case Study:
If I ask you to invest 15K per month for 15 years, assuming a 15 percent return rate, what do you think the final amount would be?
It would be 1 Crore.
When you check the calculation, you will find that only one-fourth of the amount is invested by you, the remaining are the profits.
All those years, with the help of compound interest and the dividends being reinvested, you were able to grow your wealth to such a big number. But in reality, a 15% annual return is hard to achieve, not impossible, but hard.
You can still achieve this by increasing the SIP amount for the same duration.
How To Decide The SIP Amount To Achieve Your Goals:
In this section we will learn about how to set-up the SIP for our requirements.
Go to our previous article where you determined your requirements for the total wealth needed on that very day.
Since we are doing the SIP, we know that we have to invest money regularly so it would take certain years for it to come to fruition. But meanwhile your value of the Money Goals will also increase due to inflation.
So considering an inflation rate of 6%, estimate the growth in the Money Goals. Here I have used my own needs for the same.
Now, we have to determine our monthly SIP amount, based on the inflation adjusted values.
Let’s say we expect a rate of return of 12% in our preferred asset. And to reap the benefits of compounding, we are aware that we should leave the assets to grow.
As the value of our goal increases, we should base our investments according to the updated value.
So now, calculate, what should be the monthly SIP amount to invest if we expect it to grow at 12% for 10 years?
The amount comes out to be 5.5 Lacs.
Similarly for 15 years, the amount is expected to be around 3.3 lacs.
Below I have completed table for different interest rates and for different durations.
Note that, higher the invested duration, lower is the amount required.
Conclusion:
Disciplined investors may be able to ride out market cycles with SIP because of its simplicity and ease of understanding. Given the benefits of SIP investments, get started by using SIPs to invest in mutual funds and work towards achieving your financial objectives.
Finance Education Series
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