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How can I invest regularly to achieve my financial goal?

When saving or investing it is key to eventually reach your financial goals make regular and consistent investments.

You can make regular payments of as little as Rs 500 a month into investment products such as mutual funds.

These regular investments into a mutual fund scheme are popularly known as systematic investment plans (SIP).

A Systematic Investment Plan (SIP) helps you with regularly adding a fixed sum to a fund of your choice at a fixed frequency. Generally, the frequency is monthly, but it can also be weekly or quarterly.

SIPs neatly solve the three main problems that prevent investors from getting the best possible returns from their mutual fund investments:

Firstly, through a SIP a fixed sum is invested regularly regardless of the NAV or market level. This means that investors automatically buy more units when the markets are low. The arithmetic is simple. Suppose you are investing Rs 10,000. In a month when the NAV is 20, you will get allotted 500 units because 10000/20 = 500. However, in a month when the NAV is 16, you will get allotted 625 units, as 10000/16 = 625.

Thus you have automatically bought more units when the markets are lower. When the time comes to redeem your investments, all the units are worth the same. However, your profit margin is higher for units that were bought at a lower price. Effectively, you have paid a lower average price, which translates to higher returns.

Secondly, SIPs are also a great psychological help while investing. Investors inevitably try to time the market. When the market falls, they sell and they don't invest any more. When it rises, they invest more. This is the opposite of what should be done. An SIP puts an end to all this by automating the process of investing regularly. It eliminates the mental burden of deciding when to invest which could lead to better returns. Hence an investor does not have to time the market to determine the 'right' investment moment. Timing (and thus predicting) the market correctly is extremely difficult. Not even professional investors are able to do this.

Thirdly, investing through a SIP is a hassle free way to invest regularly. Otherwise you might forget to put money aside on a regular basis. A SIP automatically inculcates this practice. You don't have to think about it anymore and also don't have to undertake any action. The money is withdrawn from your account and invested automatically.

KEY POINTS

Invest through a SIP if you want to:

  • Average out the costs of the acquisition value of your investments
  • Get rid of the psychological burden of timing the market (staying in the market for a longer period of time is much more important!) Invest (small) fixed amounts at regular intervals without having to think about it or undertake additional action
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Mutual fund investments are subject to market risks, read all scheme related documents carefully.