Before we discuss about SIP, we will first understand a little about mutual funds.
What are mutual funds?
Mutual funds are popular investment tool because they allow you to invest in stocks and bonds without the stress of deciding the right ones to buy or the right time to sell. When you invest in mutual funds, the money goes into a common pool of money along with other people’s investments. The portfolio manager of the mutual fund starts investing the collected money into various stocks and bonds in the market. The fund house then issues share to the investor so that they have an ownership in the fund.
How do mutual funds make money?
Mutual funds generate money in two ways:
Through capital gains-buy low sell high.
Through cash flows i.e. dividends in the case of stocks and interest payments in the case of bonds.
Money management techniques in mutual funds:
The mutual fund has provided us with essentially three management techniques namely,
Systematic Investment plan (SIPs)
Systematic Withdrawal Plans (SWPs)
Systematic Transfer Plan (STPs)
Here we will majorly discuss about SIPs.
What are SIPs?
SIP is one of the most commonly used and convenient methods for most investor for wealth creation especially for beginners in the stock market. A fixed sum of money is invested on a fixed date irrespective of the market conditions.
Advantages of having SIP:
It inculcates regular discipline in investors.
SIPs alters risk by rupee cost averaging.
SIPs buy you more mutual fund units during dips and less during peaks- a perfect strategy to average out the costs.
Now that you understand SIPs and mutual funds and how do they work, do you think there is anything that can stop you from becoming wealthy? Yes, there is another lesser known, yet equally important-aspect to becoming wealthy in conjunction with SIPs. Just having an active SIPs alone can’t make you wealthier until you abide by the “Principles of Wealth Accumulation”. Let’s discuss them briefly:
Have a strong reason.
You must have heard many of these:
Where do you see yourself in five years from now? What are your goals in life?
Why do you need money?
Why do you want to become wealthy?
What is the significance of financial freedom?
What would you do if you become financially free?
As common and simple are these questions are, it is difficult to answer them. However at the same time, it becomes equally important to answer them, otherwise, it may be difficult to survive in difficult times.
Start early
One of the greatest misconceptions about investing is that it takes a lot of money to make a lot of money. What it takes is some money and a lot of time. Hence, time becomes the most crucial component of investing, and is also the one we easily waste.
Pay yourself first before paying others
Many of you may immediately think of reasons for not being able to save at least 10% of your salary, but believe me, 90% of your income will be as sufficient for you as was 100%. If you are starting early with this blog, 10% savings can be good enough to start with but if you are starting late, then you need to make up for the late start.
Unleash the power of compounding
If Christopher Columbus had invested $1 in 1492 at 5% simple interest, today, it would be worth approximately $25(an increase of 25x). If the interest on the invested $1 had been compounded annually, guess what it would be today?
30x, 40x, 50x? My initial guesses were in this range until I saw the correct answer.
Well, it was more than $50 billion!
Take a moment. It’s not 50x, its 50 billion x. It’s billion times more with compound interest than with simple interest.
So start early.
Get rid of Credit cards
A credit card is a wonderful tool which allows you to buy things which you do not want with the money that you do not have.
You may argue in favour of the convenience that plastic money provides. Well, you have debit cards for the same. In fact, there is a difference in the way our mind thinks whenever we use a credit card or a debit card.
Credit card: Ok, I don’t have to pay it now. My bank balance is not impacted. We will see when the credit card statement comes.
Debit card: This is going to take off some money from my bank account. This hurts, I should go for it only if it is absolutely necessary.
So, keeping a debit card is a safer bet.
Respect yourself and your money
Respect attracts money, this one of the reasons why rich get richer. If you respect your money, you will become a magnet, attracting more and more money.
You might say here that you already respect your money, what else do you need to do? Well, just take out your wallet and see how the notes are organized in it. Are they all facing different ways? Are the tens mixed with the twenties and fifties? Are they just stuffed in there, so that you have to unravel them to find out what they actually are? How you keep your money is where the respect for your money starts.
Stop procrastinating, get started
Wikipedia defines procrastination as “the act of replacing high priority actions with tasks of low-priority, and thus putting off important tasks to a later time”.
“Procrastination never won a race, received a promotion or changed the outcome of any situation.”
We have all experienced it, whether it is calling the repair man to make required alterations in the house, studying at the least moment or planning your financial freedom. Procrastination turns out to be one of the worst enemies to anyone’s wealth building abilities.
If you start investing today then in one year you will realize how much money you actually lost by starting one year late.
As they say, “If and When were planted, and Nothing grew”
Be patient
A lot has been said about the power of compound interest, but the importance of compounding can never be overstated. However, because of the way compounding works, it is easy to lose patience. In such times you must remember that with compounding you earn roughly 75% of your money in the last 25% of the tenure you have planned for financial independence.
So the magic of compounding has an in-built delayed gratification. Do not get impatient. Your corpus will increase exponentially after a certain stage. Give it time.
Warren Buffet is a great investor, his skill is investing but his secret is time. Of his $84.5 billion net worth, $ 84.2 billion was accumulated after the age of 50. If he would have lost patience at 50, he would have ended up with wealth of just $0.3 billion, which would have been 99.97% less than what he has accumulated so far.
Sharpen your financial saw
Here’s an example from the book Seven Habits of Highly Effective People by Stephen R. Covey.
Suppose you were to come upon someone in the woods working feverishly to saw down a tree.
“What are you doing?” you ask
“Can’t you see” comes the impatient reply. “I’m sawing down this tree”
“You look exhausted!” you exclaim. “How long have you been at it?”
“Over five hours” he replies. “Well, why don’t you take break for a few minutes and sharpen the saw?” you inquire. “I am sure it would go faster.”
“I don’t have time to sharpen the saw, I ‘m too busy sawing!” the man replied.
Doesn’t it sound familiar? We seemingly never have time in life to do all those things which have tremendous consequences in our lives. Keep yourself up to date, learn continuously and challenge your own limits, take risks and do something that keeps you going.
Bruce Barton once said: “Sometimes when I consider what tremendous consequences come from little things… I am tempted to think that there are actually no little things.”
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