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Inculcate financial discipline |
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Helps you make investment your first priority from it being your last priority. |
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Average out your cost of investment and hence reduce your risk |
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Lets say you invested Rs 1000 every month. And lets say the scheme invested in is available at a rate of Rs 20 per unit. Then in month 1, you will be able to obtain 50 units. In month 2 if the unit value goes down to Rs 10 then you will be able to obtain 100 units. |
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Hence for Rs 2000 invested over 2 months the total value of your investment at the end of 2 months is Rs 1500. However if you had invested a straight sum of Rs 2000 in month 1 when the rate was Rs 20 per unit – your net value at the end of month 2 will only be Rs 1000/-. |
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Hence an SIP helps you average out your cost and thereby reduce risk resulting in generating superior returns. |
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Helps in compounding your wealth |
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Getting rich is simpler than you think, here's a simple formula to get rich: |
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Start Early + Invest Regularly = Create Wealth |
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Invest Regularly |
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Systematic investing has a compounding effect on your investments. In the long term, an investment as low as Rs 1000/- per month swells up into a huge corpus. |
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This can be best explained by the following graph. The graph shows the value of investment at various rates of return for Rs. 1000/- invested every month for 30 years. |
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The BSE Sensex has generated returns at 19.43%* CAGR from 1st January 1991 to 1st January 2008. Rs. 1000 invested every month since January 1991 would have led to a total investment of Rs. 3.6 Lakhs. This investment would have been worth Rs. 2.03 Cr in January 2008. |
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Did you know that Rs 1,000 invested every month would total to Rs 240,000 after 1 month? Yes – and in the above example we have assumed ZERO growth rate. To understand the power of compounding further, lets just add a simple growth rate of 3%. Then Rs 1000 invested every month becomes Rs 327,660. At 20% the amount will grow to Rs 24,76,191/-. Isn’t that incredible? |
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Start Early |
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Now that we know that the power of compounding can create magic for your investments, starting your investments early also has its own advantages. Starting early means that the power of compounding starts acting on your money earlier thereby generating higher returns. |
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Consider the following graph: |
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An individual who starts planning for his retirement at 25yrs of age by investing a modest Rs. 1000 / month collects upto Rs. 40 Lakhs on retirement whereas his investment over the period is just Rs. 4.2 Lakhs |
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On the other hand if the same individual delays his retirement planning by 5 yrs, his wealth upon retirement reduces significantly (approx Rs. 15 Lakhs.) |