Time tested principles – Start Investing Early and Invest Regularly

SIP – A boon for investors

One of the best rules of investing is to save on a regular basis. SIP or Systematic Investment Plan provides the investor the best combination – Dollar Cost Average (DCA) and compounding, available to investors. Investing a fixed amount every month through SIP makes the investor disciplined and benefit from the market appreciation over time. Investors can invest the minimum amount (depends on various mutual fund houses) per month in a fund.

Source: Pricipal Mutual fund

Dollar Cost Average (DCA)

Investing a fixed sum regularly means averaging out the cost, as the investor gets fewer units when the NAV goes up and more when the NAV goes down. Investing through SIP, an investor can invest a fixed amount every month in a fund and take advantage of the fluctuations in the market by buying fewer units when the market goes up and more unites when the market go down.

Compounding

Compounding basically means earning money not only on your investment, but also on the amount your investments earns. The earlier you start investing the longer your money can work for you. By starting early and continuously reinvesting your earnings you increase both your investment and earnings over time. This effectively makes even small investments become larger, over time. For instance, if you begin investing at the age of 30 and invest $ 1000 every month (i.e. $12000 in an year) at 6 per cent a year and roll over the proceeds until you are 60, you will get $ 17.02 lacs. If you begin 10 years later i.e. at age of 40 and invest the same amount at the same rate (9 per cent a year) you will only get $ 6.39 lacs. That is allowing your money to compound longer, you can be richer by $ 10.63 lacs.