How to Generate a Second Source of Income?

In Financial Planning by Surbhi Parasrampuria0 Comments

Make Your Savings Earn You Money

We are taught from our childhood to save a part of our income.

Earnings = Expenditure + Savings.

Traditionally the next step was to put the savings into a savings A/C, recurring deposit, term deposit or fixed deposit. The above ensured security of money from default risk and the saving generated an interest income. But the interest income so generated (saving a/c gives 4%) is so minimal today that it does not even fight inflation (6%). Hence over time the account holder will depreciate his/her wealth rather than appreciating it. Even in case of FDs, the actual interest rate might range between a mere 0.5%-2% after counter bating the inflation rate.

Alternatively, to grow one’s wealth we suggest one to look at investing in equity. As continuous tracking is not possible for most of us, we rely on professional managers for the same. The safest option for us is to invest in mutual funds, which are led by experienced fund managers. The key here is to select the best-suited funds for the investor. As these funds invest in a basket of stocks they are well diversified and have outperformed all other asset classes over the last 15 years.

A Systematic Plan or SIP is a flexible and easy investment vehicle offered by mutual funds (MFs). A predetermined amount is auto-debited from investor’s bank account and invested into a specific mutual fund scheme at regular intervals (monthly, quarterly, etc.). The fund allocates a certain number of units based on the ongoing rate (called NAV or net asset value) for the day to investor’s account. Every time money is invested, additional units of the scheme are purchased at the then NAV and hence the investor’s portfolio builds on.

Advantages of SIP investments

Timing – Most investors are skeptical about the best time to invest and the guessing game for entry into the market begins with it. SIP allows the investor to invest regularly. This regular investment over time gives us the USP of SIP: Rupee-cost averaging. Since investment is done regularly, amount invested fetches units when the NAV (price) is low as well as when it is high. Thus, averaging the rupee cost per unit.

Diversification – As stated earlier, the stocks are cherry picked by managers who have the required knowledge, skill and expertise to handle the portfolio. They carry out extensive research on the company, the industry, the sector, and the economy as a whole, thus ensuring informed and diversified investment. This putting of eggs in different baskets gives us the second advantage of SIP: Diversification of investments. Huge amount of effort would be required to achieve this diversified portfolio, which would not be possible for any passive investors.

Compounding – Before enlisting a list of additional cues on why SIP is advantageous to young investors, another big factor promoting SIP would be: Power of compounding. Compounding allows one’s investments to grow at a faster rate. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He, who understands it, earns it… he who doesn’t… pays it.” To reap the true benefits of compounding, a minimum three-year SIP plan is recommended. The earlier the investor starts, more is the time for a great portfolio to come into shape.

Disciplined Saving: Discipline is the key to success. SIP ensures disciplined savings by the investor at regular intervals.

Easy on the wallet: SIP allows investor to invest very small amounts (Rs 500, Rs 1000) in SIP, which goes easy on the wallet during initial years. It, therefore, becomes an ideal option for a first time investor, who would otherwise not be able to enjoy the benefits of investing in equity.

Flexible: Though a long-term SIP is recommended, it is flexible for the investors to discontinue, increase or decrease the amount and/or interval of investment plan as per their wish.

Hassle-free: It allows investors to give a standing order of auto debiting their account on specific dates, which saves the investors a lot of time.

Regulations: The mutual fund industry is all transparent and well regulated both by SEBI and AMFI. So its gives investor an extra dose of security.

To know how to initiate an SIP with RupeeVest call us on +913340634565

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