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Buy low and sell high
The maths is very simple. Buy more units when the markets fall and sell them at a higher price when the markets again rise. This is the basic idea behind SIP investment in mutual funds. Let’s say that one unit of a particular mutual fund is selling at Rs.50 today. The investor is planning to invest Rs. 5,000 monthly in this fund. Then at the current price, he will be able to purchase 100 units (5000/50) every month. But in a particular month say the NAV drops to 40 then he will be able to buy 5000/40 = 125 units in that month (25 units more than usual.)
When the investor chooses to redeem his units, all of them would be sold at the same price. But he would earn higher returns on the units that he had bought at a lower price. This is called rupee cost averaging and it is what makes the SIPs so attractive. It helps to neutralize the volatility of the market and ensure a stable return to the investor.
But one thing is to note is that the investor should be willing to stay invested over the long term to truly reap the rich benefits of his SIP investments. Historical data shows that SIPs give attractive returns over a period of 15-20 years. Hence the investor must be patient and disciplined in regularly investing money over this duration. He should ensure that there is no break in this exercise and the investment keeps continuing per month.
SIP investment made easier
With advances in technology, investing is SIP is now much easier as compared to before. Previously the investor had to submit a bunch of cheques to the mutual fund company for investing every month. But there was a limit on this as well. At a time, he could not submit more than 12 to 36 cheques. So naturally, people thought that SIPs are a fixed tenure investment. After the cheques got over, people will again reconsider their decision to continue with the SIP mode of investing. In that process, many people used to opt-out of it afterward.
But now it happens with the click of the mouse. The investor just needs to submit an ECS mandate to the bank to allow the mutual fund company to debit a fixed amount from the bank account each month. And this can continue indefinitely till the investor chooses to stop the SIP. At that time, he has to inform the mutual fund company to cancel the SIP and the ECS would be revoked with immediate effect.
SIP returns are the best
The returns offered by SIP investments are nothing short of amazing. I took up 4 funds that have been around for decades and calculated what would have happened if I had done a modest SIP for the last 20 years.
It turns out that just a small investment of Rs 5,000 a month over two decades left me with sums of Rs 1.29 crore, Rs 1.85 crore, Rs 1.21 crore, and Rs 2.05 crore for the four funds. The amount invested in each case was just Rs 12 lakh (Rs 5,000 a month for 20 years). An investment like this can change the life of a middle-class person. However, there’s no special complexity in doing this. Just something straightforward, done over a long period.