Among several investment terms, a commonly heard term is market timing. Market timing means frequently investing and exiting your investments through profit booking. Similarly, there are many investors who believe in the ‘invest and hold’ rule. Some investors may follow the rule of balancing their portfolios through investments in different asset classes.
There are various investment rules; however, as an individual investor, you must adopt a consistent approach to maximize your benefits. It is almost impossible to time the market and trying to use this strategy to earn profits is not recommended. One way to take advantage of market movements is to adopt a cost averaging theory also known as Systematic Investment Plan (SIP).
SIPs are smart financial tools that enable building wealth over a period of time. You may start this plan for any amount and take advantage of rupee cost averaging and power of compounding. It is a disciplined investment approach that protects you against inflation.
Here are five benefits of investing in systematic investment plans.
- Disciplined approach
You may want to accrue huge profits by timing the markets. However, it requires in-depth knowledge, technical understanding, market research, and a lot of time. In addition, it is a risky investment strategy and you may lose all your capital. A systematic investment plan allows you to follow investment discipline and invest a certain amount at regular intervals. You are able to eliminate the risk of adverse market movements. Moreover, continuous tracking of the markets is not required.
- Rupee cost averaging
This is another strategy that overcomes the need to time the market to maximize returns. You invest a fixed amount at regular intervals to accumulate wealth in the long term. Because the investment amount is fixed, you are able to buy more when the prices are low and vice versa. This averages the overall cost of your total holdings.
- Convenient and easy
You may not have the time to constantly track the markets and schedule your investments. With SIPs, investment is easy and convenient and may be done by giving an auto-debit instruction to your bank. You receive an account statement periodically, which allows you to monitor and track the progress of your holdings.
- Power of compounding
An important rule is to start investing early and continue with it regularly. You may invest a small amount and still accumulate huge wealth through the power of compounding. Compounding generates the returns on your principal to earn profits, which enables you to accrue a huge amount over a longer period of time. It is important you start early to stay invested for longer, which further helps accumulate huge wealth.
- Low investment amount
You do not have to start a systematic investment plan with a large principal amount. You may invest as low as INR 500 or INR 1,000 each month to earn profits. As your income rises, you may choose to increase the investment amount.
A systematic investment plan allows you to invest any amount without needing a huge upfront principal. Furthermore, you are protected against market risks and have the advantage of professional experts who manage the fund portfolio. This plan also provides tax benefits, which further increases your returns.
Start investing today and accumulate wealth in the long run.