Remember the story of the thirsty
crow? I heard it in my childhood and have read the same story to my son umpteen
number of times. The smart crow kept on dropping the pebbles into the half
filled pitcher till the water level came up. Birla Sun life Mutual Fund has
very appropriately used this story in it’s advertisement to promote SIP. They
say a smarter way to save regularly. Yes it is. There cannot be a better way of
explaining the benefits of SIP.
The SIP or the Systematic
Investment Plan works exactly in the similar manner. It simply means investing a fixed amount of money at regular intervals say a quarter or a month, with a clear financial goal in mind. You keeping putting in money just like the
pebbles till you reach the desired goal.
Let’s understand this with an
example. In this example three gentlemen A, B and C who are 30, 27 and 25 yrs
old respectively; decide to save for their retirement at 60. Assuming an annual
saving of Rs10000/- (approximately Rs.833/- per month) in an instrument providing
a return of 15%; all three of them land up putting in 300000/-, 330000/- and
350000/- respectively. There is difference of only Rs 50000/- between the
amount put in by A and the amount put in by C; however there is a whopping
difference between Rs 4999569/- and Rs10133456/- received by them at the age of
60 yrs. This is power of compounding.
Another advantage of SIP is Rupee
Cost Averaging. In RCA or Rupee Cost Averaging a fixed number of shares are
bought irrespective of the price; more shares are bought when the price is low
and vice versa. Eventually, the average cost per share becomes smaller and
smaller and this helps you gain better overall profits as the market increases
over the long term. It’s a long term strategy, and one has to keep in mind the
smart working done by the thirsty crow. More on this to continue. Till then
Happy SIPPING!! Stay blessed!!
