Mutual Funds
Paying Yourself First
A strategy for regular investing
What can you do today to help secure your financial future? Pay yourself first by regularly investing some of your discretionary income. Rupee-cost averaging is a good way to pay yourself first. Most popularly known as “Systematic Investment Plan” or just “SIP”
How Do the Ups and Downs of the Market Affect You?
The market’s ups and downs are a double-edged sword. When we let emotions influence our investment decisions, market ups and downs may result in many people buying high and selling low. When we let the time-tested strategy of Rupee-Cost Averaging (RCA) guide our investment decisions, emotions are often overridden by consistent and regular investing.
Rupee-Cost Averaging (SIP) offers key advantages to investors:
It’s smart. You automatically buy more units when prices are low and fewer when prices are high. The result: Your average cost per unit is less than your average price per unit. The only time this would not occur is if the unit price remained constant.
It’s painless/stress free. When you pay yourself first every month before you pay the bills, you’ve wisely placed your money in an investment before you realise it was ever there to spend. It’s a good way to invest long term for your retirement.
It’s disciplined. Rupee-cost averaging takes the emotion out of investing and offers you the opportunity to take advantage of market highs and lows.
It’s sound. Rupee-cost averaging helps you avoid the pitfalls of market timing — investing based on trying to predict future market directions.
It’s prudent. Investing a lump sum can put a large amount of money at risk. When you use rupee-
cost averaging, you’re placing smaller amounts at risk — spread out over time.
SIP in Action*
The chart below shows how SIP works. In this example, the client invests ₹10000 in a mutual fund each month for 12 months
In the hypothetical example, the Rupee-cost averaging strategy( SIP) ended up with a greater amount of total units, and hence more money (greater current value), at the end of the 12 months. An important note to remember is that the value of your investment is based on the number of units you have and SIP may help you maximize the number of units you own.
Rupee-cost averaging (SIP) may be for you if …
- You can commit a fixed amount of money every month to an investment.
- You take a long-term perspective with your investments.
- You can resist the temptation to withdraw assets or stop monthly investments when the market is volatile.
Of course, no investment strategy — not even Rupee-cost averaging (SIP) — can guarantee a profit or eliminate the risk of loss. You should consider your ability to continue investing regardless of fluctuating security prices.
Start paying yourself first today and invest in your future.