Start off with a systematic investment plan (SIP)
SIP entails regular investments of a small sum each month into a wealth creating avenue such as equity mutual funds. You don’t try too hard to time the market but just invest a fixed sum passively into the fund each month. If you are wondering how to create wealth through regular investments, check the table below.
|Particulars||10-year SIP||15-year SIP||20-year SIP||25-year SIP|
|SIP tenure||10 years||15 years||20 years||25 years|
|Nature of SIP||Equity Funds||Equity Funds||Equity Funds||Equity Funds|
|Indicative Yield (%)||15%||15%||15%||15%|
|Total Investment||Rs6 lakh||Rs9 lakh||Rs12 lakhs||Rs15 lakhs|
|End Value||Rs13.93 lakhs||Rs33.84 lakhs||Rs75.80 lakhs||Rs164.20 lakhs|
|Wealth Ratio||2.32 times||3.76 times||6.32 times||10.95 times|
In the four scenarios, we have assumed the same monthly SIP but for different tenures. The wealth ratio (Net worth/Total income earned) increases sharply as your tenure is extended. In other words, your SIP is more valuable if you do it for longer periods. For 2019, consider a resolution for starting on your wealth creation journey with an equity SIP. Here is why it will work for you.
SIP works because of the power of compounding
What is compounding? Compounding refers to the rising value of an investment due to the interest earned on both the principal and the accumulated interest. Hence, if you start off with Rs100 each month for 10 years, with monthly compounding at 12%, you would be able to double your wealth. That’s right! In the case of an Rs5000/- per month SIP for 25 years, you are actually making the power of compounding work in your favor. The longer you invest, the more your principal and returns work for you. One of the supplementary resolutions you must make is not to touch your SIPs and disrupt your long-term wealth creation goals.
SIP works because it is all about discipline
When you make a New Year resolution to create wealth, you will also realize that discipline matters. This means that from January onwards, Rs5000/- per month or whatever amount you decide as apt is a fixed commitment for you. Treat it like a commitment just as you treat your car loan EMI or home loan EMI; the difference being that this is a wealth-creating EMI. The focus on discipline is to avoid getting obsessed with timing the market, which is neither possible nor material. Stay on course and stay disciplined in your equity fund SIP; the rest of the wealth creation will follow.
SIP works because it adjusts costs in your favor
The term “rupee cost averaging” is frequently used by all of us. It means that when you consistently keep buying an equity fund, you handle volatility better. When the NAV is higher, you get more value and when the NAV is lower, you get more units. Effectively, it is a case of “Heads you win and tails you don’t lose.” This will enhance your returns and effectively your long-term wealth too.
Let New Year 2019 be a departure from your routine resolutions! Resolve to become wealthy the disciplined way and stick to it.