Small but regular investments have been the most reliable mode of savings since decades. As a kid, you may have put away the small change in your piggy bank as frequently as possible. As a grown-up it is recommended you continue the same habit.
The challenge, however, is, putting small change aside in a piggy bank is not going to help build wealth. So where should you save or invest to achieve financial security in the future? There are multiple investment options available in the market, and you must choose one that is not only convenient but also maximises your returns. Furthermore, you may want to avoid high risk based on your personal choice.
Systematic Investment Plan (SIP)
A systematic investment plan is an option wherein you invest a specific amount in any mutual fund as per your choice on a specific date at regular intervals. It may be as low as INR 500 per month in a fund of your choice. The corpus is in turn invested in a diversified portfolio of equities and debt as per the schemes’ investment philosophies by the respective fund managers. These investments deliver higher returns when compared to safe instruments like fixed or recurring deposits. Furthermore, these are not as risky as stock market investing and are an excellent tool to invest smaller amounts to achieve financial security.
When you opt for a systematic plan, you do not need to time the market to earn profits. As you make smaller investments at a regular interval, at the then prevailing prices, it reduces your risk on the same. When the prices are higher, you will purchase lesser units and vice versa. This offers protection from the price volatility, thus averaging the cost of the total units purchased.
Most mutual fund houses allow systematic investment on specific dates. This means your bank account is debited with the pre-determined amount only on these dates. The most common investment dates are 5th, 10th, 15th, 20th, and 25th of every month.
When you consider starting a systematic plan, you may wonder if investing on a particular date has an advantage over other days. Although the date does not matter, it is observed that when you invest towards the end of the month, you may gain some minor additional profits. This is because all open derivative contracts expire on the last Thursday of every month. Therefore, the stock market volatility is higher during this period, which gives you slightly better returns.
However, if the date is not particularly important, regular investments in these plans are crucial. The returns on your investments almost remain the same irrespective of the investment date during the month. The difference between two dates is barely one percent. This is true even if you hold your investments for a longer period.
It is advisable that you set the SIP investment date earlier in the month. It must be just a few days after your salary is credited to your account, as this will ensure there are sufficient funds in the account to process the payment. A later date may result in missing the installment because losing track of your bank balance with the myriad of expenses is easy.
Start a systematic plan today and make your money work for you.