A Systematic Investment Plan (SIP) is a means to invest money in mutual funds in small amounts on a regular basis. It disproves the notion that investing money is difficult, time consuming and requires a boatload of capital. SIPs allow you to set aside an amount that is taken away from your account either monthly, quarterly, semi-annually or annually just like how a credit card payment or any other auto transfer would be. Investment Company’s/Asset managers such as UBL Fund Managers allow you to start from as little as Rs. 500 per month!
The money is used to invest in a mutual fund of your choosing. Your investment is handled by a qualified professional so you do not have to worry about picking stocks or other securities to invest in. SIPs are extremely flexible. You may choose one or multiple mutual funds to invest in and have different SIPs running at the same time. You can specify the amount of time you would like to invest over, and you may change this as you go along. For example, you may have originally wanted to invest over 3 years to but a year later decided that you were unable to continue for whatever reason. You can discontinue and cash out an SIP at any point and there are no penalties for missed payments and early closures. This is because you are the only one losing out on savings and investments by missing payments or cancelling your SIP – the asset manager has no reason to charge you further.
You are also able to change the frequency of payments into your SIP and the amount that you invest. There is even flexibility in the payment methods – you may provide standing instructions to your bank, provide post-dated cheques to the fund manager that provides you the SIP or invest through your bank’s online banking portal (given that the SIP is offered by a fund manager who has an arrangement with your bank where you have a current account).
The main advantage you must consider of SIPs is the wonderful thing called “compounding”. This is when the value of your investment increases at an exponential rate over time due to compounding profit. It creates a multiplying effect on your savings as regular profits paid out to you are reinvested, so you earn a rate of return on your principal as well as accumulated profit over time. For example, if you invest Rs. 5,000 monthly using an SIP, your investment would stand at around Rs. 1,000,000 in 10 years assuming a 10% growth rate per annum. If you were to simply save that money in under your mattress (like your grandma might have), it would be worth Rs. 600,000. You can use the savings calculator at http://www.ublfunds.com.pk/individual/resources-tools/investment-calulators/general-avings-calculator/ to find out how much you can save using SIPs.
To make the most of these investment tools available to us, we must act early and act fast. The benefits of saving and investing at an early age are tremendous. For starters, it adds discipline to your life and how you manage your income and budget on a regular basis. Secondly, you also allow your investment to grow through compounding. For example, if you start investing at Rs. 5,000 every month at age 35, your savings would stand at around Rs. 65 lakh by the time you are 55 assuming a 15% yearly growth rate. On the other hand, if you were to start saving the same amount at age 25 under the same conditions, your investment would stand at around a whopping Rs. 2.7 crore! You can see the effect the additional 10 years has on the value of your investment – and this is the magic of compounding.
These investment plans are growing in popularity and are easily accessible with major asset management companies such as UBL, MCB and Al Meezan. They cater to all kinds of risk appetites and capital. The flexibility available leaves us with practically no reason not to invest. SIPs are particularly useful if you would like to save up for a specific goal. You might be planning on buying a house or a car in a few years’ time. Or it may just be a holiday or another item that you would like to spend on. Using the tool given above, you can figure out roughly how much you would have to set aside every month and what kind of return you should seek. You should discuss these goals with a representative/investment professional who will guide you accordingly.
Even if you do not have a specific goal in mind, you should still consider investing in SIPs for your financial security and to take advantage of higher returns as compared to your standard savings accounts.
Disclaimer: This article is for informational and awareness purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory. No reference to any specific security constitutes a recommendation to buy, sell or hold that security or any other security. Nothing in this article shall be considered a solicitation or offer to buy or sell. Readers, subscribers, users are encouraged to get in touch with investment advisors for professional advice.