The ever-increasing rate of inflation has taken a toll on every individual, making it really difficult to cope up with a manageable rate of savings. On top of it, the recent downturn in the stock markets has also reduced the rate of return on investments, due to which both savings and investments in the economy have taken a profound dip. However, a disciplined strategy of investment, if followed, will definitely lead your way through to overcome the rising cost of inflation. One such powerful mode of investment is the Systematic Investment Plan, more popularly known as the SIP.
As the very name suggests, SIP is an investment scheme in which a fixed amount of money is invested in a particular scheme at regular intervals. In a Systematic Investment Plan, an investor gets the freedom to invest small amounts of money at specific periods, regardless of the NAV of that scheme.
Rupee-cost Averaging
In a long-term investment strategy, the rupee cost averaging can smooth down the effects of market's volatile movements. The fixed payments at regular intervals in SIP enable the investors to get more units of the scheme when the NAV (unit price) is lower. Simply put, the number of your investments increases even when the market is not on a normal high. In this way, the average cost per unit (per share) of your investments would reduce over time. Let's say you invest Rs. 1,000 in a SIP when the unit price is Rs. 25, you simply get 40 units of the scheme. At the time of your next payment, if the market goes down and the NAV of your investment scheme reduces to Rs. 20, you will automatically get 50 units in your portfolio. Such a phenomenon is known as Rupee Cost Averaging
According to recent reports, SIP has gained considerable importance in developing economies like India where markets are much unstable and unpredictable in nature as compared to the West. It can not often be predicted to which direction the interest rates will move, eventually affecting the inflation rate of the country. Trends show that majority SIP investors with a market exposure of minimum 5 years are still continuing with their investments with a firm confidence of growing in the long run.
Compounding Principle
The principle of compounding basically works on the magic stick of 'time'. The longer the time period for which the investment is made, the higher your returns are. Compounding is a process of generating returns on your asset's re-invested earnings. The regular payments made in a Systematic Investment Plan earn you incremental returns on the principal amount plus the accrued gains are compounded as well. An SIP makes the best use of the compounding principle. It has been considered as the latest strategy for investing systematically especially in the Indian market. Due to the volatility of market, investors are now switching to investing small amounts regularly to benefit from the power of compounding and eventually build a large corpus over time.
This article has been written by a professional writer, Pulkit Singh Saini, from Quickinsurer.in, an insurance comparison, transaction and service portal, which is owned and operated by Bajaj Capital Insurance Broking Limited (BCL).
For every type of investment solutions and premier investment advisory services, log in to http://www.bajajcapital.com. We provide customized advisory services regarding investment and financial planning needs of our invaluable clients.
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