SIP considered as the path to invest in the market for small investors who fear to invest directly in stocks can invest in mutual funds through SIP thus minimizing the risk.
SIP investment do not require a large corpus rather it can be started with minimum amount of Rs 500 (Rs 100 in some cases). As SIP do not guarantee gains but it helps to average out the cost of investment taking advantage of market volatility.
In this article I have classified a human at different stages of life i.e. (child, young individual, middle age person & retiree) how does investment in SIP helps them to accumulate big money by investing into smaller denominations. Let us see how does SIP works for us.
As the child grows start teaching them the habit of saving by giving them their own piggy bank to collect money so that child learns saving habit right from the start. As the child grows make them understand why saving is important as the future is uncertain. A chapter studied in school ” Time Value of Money” which teaches that as the time passes the value of money grows, when the child learns money value increases with time make them aware about the finance market where money can be invested instead of keeping in their piggy bank which also earns return on the principal invested.
As & when the child started earing, they are well versed about saving & investing in market & getting return. Now it will encourage the child to earn & save for future now putting the money into the piggy bank will shift into investing through SIP in mutual funds will gradually increase the investment amount & earn returns.
A young earner who just started earning have a longer tenure to reach his goals can take most advantage of compounding. An early start will give higher return even starting with a smaller amount, the compounding effect can only be seen in the long run. As a young earner does not have much of family responsibilities he have the capacity to take risk so he might start investing the equity funds, if he start saving for retirement right from this stage he will have a bigger corpus.
Making list of financial goals & segregating each of them in terms of tenure (long/medium/short). Deciding the required corpus one need for each of goal to complete. If you are not able to understand the finance market can take help of a financial expert who guides you about investment & its taxation. This helps to encourage him to earn more & so save for his better future, as time pass comes the responsibilities which are required to be fulfilled so building up habit of investing early with discipline & regularity will help to achieve goals in systematic way with proper planning.
For middle aged person whose goals are approaching near by & have only invested in the traditional modes of investment such as PPF, EPF & other small saving schemes which earn lesser return & not able to fulfill the need of desired corpus for them S.I.P can be a better option starting at a later stage still SIP can give more return than traditional mode and help to reach the desired corpus.
Investment in equity might not be best suited for a middle aged person so they might start investing in hybrid funds which invest both in equity & debt instruments, equity giving capital appreciation while debt fulfills the need of regular income. Thus by starting SIP investment in hybrid funds will give confidence to the investor to invest in mutual funds. Thereafter investor can also invest in equity funds with a higher risk investor can more return which will ultimately help to reach desired corpus with a fast pace.
The investor with the help of financial advisor can decide better how much to invest monthly to reach a desired corpus & the correct fund to invest in. He can start SIP with small amount further can increase it. If any bonus or sum received can also be invested to reach the corpus early. The lesson here is “Early start is always better”.
Retirement planning is the last goal that one have & as the retirement stage far away no one cares until & unless they reach 50 or above where they see retirement approaching near. So start planning for retirement as early you start earning. In the long run one will see the compounding effect & will create a huge corpus for self when they retire. Investing for corpus while working for money, this build up corpus will work for you in the retired stage.
Taking risk in early stage by investing equity funds will give benefit in the long run, & keep you well prepared for retirement period this will reduce earning burden during the retirement stage & you may live a happy retired life.
Winding up this article explaining different stages of life, in the next article we will see how SIP is better option of different income earners & how will sip help them to reach the desired goal with required corpus.