Investing Systematically For Financial Freedom

Investing Systematically  For Financial Freedom

Manish Kapur
Founder & Managing Partner
TRUVISORY


While the current market volatility may be making investors fearful of investing, the fear of missing out on an upcoming rally tends to push them to invest in equities without giving the investment a reasonable thought. Amidst such a dilemma, the investment decisions tend to either get deferred due to fear or get rushed into due to greed, thereby bringing to fore how emotional biases tend to impact one’s decision making process. One of the simple and easy to follow steps which can help address emotional bias is a systematic investment plan (SIP). SIP is not just an investment product in itself, but a disciplined mechanism to facilitate your investment decisions in the market systematically.

SIP allows an investor to make regular investments in any mutual fund scheme. Once the investor has registered for a SIP, he or she is not expected to perform any further actions to make investments on a weekly or monthly basis. The decided amount keeps on getting deducted from the bank account automatically on the pre-defined dates for the duration mentioned by the investor in the SIP form. At this point, the only aspect an investor has to ensure is to maintain sufficient balance in the bank for a successful SIP instalment debit.

As theoretical physicist Albert Einstein once put it, “Compound interest is the eighth wonder of the world.” Once SIP is done for a long period of 7-10 years, the returns confirm the same. The other benefit is that the investor can stay flexible about the periodicity and the investment amount to be debited. Just like a baby takes small steps while learning to walk, SIP can be considered as an investor’s baby steps into the world of investing. Through SIP, one can take exposure to an array of asset class, be it equity, debt or gold. Mutual fund houses today provide a variety of schemes which help an investor to invest into each or any of the above mentioned asset classes.

So, through the simple act of initiating a SIP, an investor can stay invested across asset classes, ensuring diversification of portfolio while enjoying complete freedom and convenience to invest as per one’s comfort. Along with this comes an added benefit of creating solid financial discipline which is a necessity for long-term wealth creation. For instance, you can invest as little as Rs 500 per month through a SIP. This means that you do not need to accumulate a sizeable fund just to kick-start your investment journey. In effect, there is no room for an excuse of not having a sizeable amount to begin one’s investment.

Once you embark on a SIP, the next major benefit it brings to you is the discipline of investing regularly. In a SIP, you have to give a mandate to your bank to deduct the pre-defined amount on a specific date every month. Hence, there is no element of forgetting to invest. This ensures that you keep on investing even while being busy with other aspects in your life. Furthermore, while SIP has become a popular term in the investor community, so is ‘rupee cost averaging’. It is something that benefits you when you invest in equity instruments. As a first-time investor, you may lack the required knowledge or expertise to track the market continuously, and it is for this reason that you are advised to invest via the SIP route.

The concept of rupee cost averaging lies in averaging out the cost at which you buy units of a mutual fund. Market volatility is part and parcel of equity investments, reflecting the ups and downs of the economy. If you recall the law of demand, it says that a higher quantity of a commodity is purchased when it is least expensive. Conversely, the demand reduces when the price of the commodity increases. The fundamental principle of investing reinforces the same thing. It guides the investor to ‘buy low and sell high’. It means that you need to buy more units of a mutual fund when the markets are down and fewer when the markets are up.

By investing through SIPs, market volatility is mitigated to some extent, and as a result, the overall gains will increase. Rupee cost averaging works out best in choppy markets but is useful even when the markets are in a bull run. It mainly helps you buy less when the markets are expensive and buy more when the markets are cheap. To conclude, SIP helps an investor to stay on track to achieve his or her multiple financial goals. Such a habit of making multiple, consistent and goal-based investments adds a lot of flavour to overall financial planning, just like a combination of multiple spices together enables one to not only deliver a complete recipe but enhance the overall taste too.

Takeaway : A force of its own, SIPs are time-tested and the preferred way for small and big investors, namely for the convenience this route brings: monthly saving, rupee cost averaging, optimal risk-reward balance and superior wealth creation potential.

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