Slow and Steady wins the Race
The most common excuse that people spell out when explaining the benefits of investing in a disciplined manner is not being able to save money by the end of the month. When it comes to investing, one need not wait till the time one can accumulate a lump sum to take the first step into investing in the stock market. Even saving Rs. 1,000 a month and investing in an equity-linked mutual fund, may accumulate lakhs a few years down the line. This form of small but periodic form of investment is called Systematic Investment Plan (SIP). One way of saving for investments is by cutting down unnecessary expenses.
A penny saved is a penny earned.
This age-old adage is the mantra for wealth creation. This is why budgeting becomes an important exercise. Most people spend first before they even think about saving, which is not a very helpful approach to savings or investing. Instead, follow the hierarchy of Earn – Save – Spend and these savings can be channelized into an investment product. Within the investment product universe, one of the options which aid long-term wealth creation is investing in an equity-based mutual fund for one’s long-term goals. The beauty of this approach will become apparent only after a couple of years when there is a neat sum gathering in one’s account, thanks to the market-linked gains that the investment may be accruing, all of which is an enriching experience. Just monitoring it and seeing it grow makes investors confident of their improving financial condition. As a result, investors tend to automatically start spending less and invest more.
SIP versus EMI.
Most people who find it hard to save and invest would happily purchase expensive items in debt. Paying EMIs (Equated Monthly Instalments) to buy a new car or a phone feels easier than investing some amount gradually to afford it in one go. Steer clear of instant gratification. It is better to start an SIP than to shell out money on EMIs. SIPs are the best EMI one pays. There is no point in paying interest on luxury. It is better to become rich enough to afford luxury.
Why SIP matters
The stock market is volatile. One day it is on an upward journey, but the tide may turn the next day. Investors should avoid predicting the stock market moves. With SIP money gets invested at different market levels that will support one’s portfolio when there is a sudden market crash. The portfolio will not crash the way individual stocks or the benchmark indices like Sensex and Nifty may crash. SIP is a weapon to tame market volatility.
Compounding is the eighth wonder of the world. The longer one stays invested and runs their SIPs, the higher rewards they earn. For example, Rs 5,000 SIP each month will give Rs 11 lakh after 10 years at a compound annual growth rate of 12 percent. Continue it for another 10 years, and it will become Rs 46 lakh. One can start an SIP for short-term goals also. However, the selection of investment products will change accordingly. Investors should always align their investment strategy with their financial goals and timeline.
To conclude, one should believe in the power of SIP where one can start small to make their bigger dreams come true. Slow and steady wins the race – the timeless moral of the Tortoise and the Hare story cannot be timelier in the current market scenario. In an era of quick money-making where everyone is behaving like a rabbit, be a tortoise to beat them all.
Source: ‘Slow and Steady Wins the Race’ by Kapil Holkar in the October 2021 issue of Outlook Money
Asset Multiplier comments:
- SIPs help investors reduce their portfolio risk, contain emotional biases, and are a disciplined approach to investing.
- The longer one stays invested and runs their SIPs, the higher rewards can be earned due to the effect of compounding. The sooner one starts, the more time there is for the invested money to produce results.
- SIPs differ across time horizons and risk profiles. Investors can achieve their short-term, medium-term, and longer-term financial goals by investing in SIPs in one go rather than choosing to pay EMIs.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”