Little things matter a lot in life. We often come across many success stories that eventually get summarised as a combined effort of many small but powerful things, done regularly. The essence of this prevails in investments as well, especially in equities. One can have a humble start, continue with it systematically, and hike the quantum periodically, which can potentially lead to a better wealth creation in future.
We have different real-time analysis that suggest equities outperforms other asset classes in the long term, but it is ‘volatile’ in nature. This V-factor (volatile factor) instills the F-factor (fear factor) among investors and keeps them at bay, from taking part in an asset class that mostly tracks the nation’s economic growth and prosperity. The ideal solution - invest systematically in a volatile asset class. SIP primarily helps doing this with ease.
The highlighting features of SIP are the benefits of cost-averaging, compounding and relief from the complex and tension prone exercise of timing the market.
Everybody is keen to buy low and sell high, if that is only so much possible. Planning the investments just based on predicting the short-term market movements is not advisable and in most occasions it had resulted in undesirable cash drain consequences. When one is investing systematically a fixed sum every month, they buy more units when price (NAV) comes down and lesser units when the price goes up. This helps the cost to be averaged over the installments. It is a pretty simple understanding. Instead of planning the investments anticipating market and price movements, it is better to spread the investments over a certain period of time, mostly aligning with the goals, so that the net cost is averaged. As long as one generates investment surplus regularly, say every month or quarter, it is highly recommended to mirror the investment pattern in a similar manner, regular and systematic.
SIP has the ability to convert random market volatility and fluctuations into a well-structured units accumulation strategy.
Compounding is one mathematical wonder that every investor should be aware of and should not ignore. Similar to the core of compounding, that is earning interest on the interest, SIPs are generally said to have a compounding effect on the returns. Investors choose equities anticipating growth in the long term. SIP is a method of investing to handle the intermittent volatility. In a SIP, investors purchase multiple units at different prices during the tenure. Over a period of time when the scheme’s overall portfolio and the NAV appreciates as expected, all the units accumulated at different prices are valued at a common higher NAV, thus compounding the returns.
Systematic investments bring in a sense of financial discipline and habit of savings. As and when investors mature and become more aware of the benefits of SIPs, they further refine their spending, increase the investible surplus, invest more and benefit more. It’s the little-little things that we do in life and investments which culminates to become a success feat in future.
The author is Investment Strategist at Geojit Financial Services