By Anu Jain, Head - Broking, IIFL Wealth Management.
Let’s start with something basic. When you want to lose weight or improve your health, you are more often than not advised to diet and exercise. However, what happens if you go to the gym, let’s say for one week, and then for the next one month you don’t go and then again pick up after a month? For one, you lose momentum. And secondly, the effort that you made for the first week goes to waste because you lacked consistency. So, after one month when you go back to the gym, you have to start from level zero once again. The same goes for dieting as well. It is well known that fad or one-time diets can do more harm than good. You diet for a few weeks or months, lose some amount of weight and then as soon as you go back to your regular habits, all the weight comes back with a vengeance. This is why doctors advise that if you want to holistically improve your health then you should make lifestyle changes. You should regularly exercise and keep an eye on what you eat.
Investing is similar in nature, says Anu Jain, Head - Broking, IIFL Wealth Management. There is no doubt that small savings and investments done over a period of time can reap significant long-term gains. Of course, there is no harm in investing that one-time bonus or windfall gains that might come your way. In fact, it is always best to apportion a fraction of any one time increase in income to investments. However, the flow of such income is uncertain and thus, you can’t really depend on it to create wealth. Jain tells us that you inculcate the habit of making regular investments instead. Here’s what she has to say.
Comparative Study
Let’s play with some numbers. Assume that two friends, Deepika and Priyanka, start their financial planning journey together at the age of 25. Deepika invests in an ad hoc manner, investing some money every few years. Priyanka, on the other hand, has started a Systematic Investment Plan (SIP) of Rs 5000 every month. A SIP is an investment vehicle that enables you to invest a fixed amount of money into a mutual fund scheme or any other investment scheme, on a periodic basis. Assume, they continue to invest till the age of 55, i.e., for 30 years and earn the same rate of returns. Who do you think would have accumulated more wealth?
Over a period of 30 years, Deepika would have invested Rs 18 lakh and accumulated Rs 1.45 crore. Over the same time period, Priyanka would have invested Rs 18 lakh and accumulated Rs 1.76 crore through her SIP investments (this is a rough estimate; SIP returns depend on where the money is invested and other factors). While changes in Deepika’s investment pattern can help her accumulate a higher amount, the bottom line is that those people who invest regularly, in most cases, can generate a higher ROI than those who invest sporadically.
Benefits Of Regular Investment
Several other benefits of investing regularly include:
It helps you reap the benefits of compounding: Compounding is a mathematical process that ensures that both your principal as well as the interest generated earns money. For example, assume you invest Rs. 100 at 10 per cent per annum. At the end of Year One, you will earn 10 per cent of Rs 100, i.e., Rs 10. Now, at the end of the second year, you will earn 10 per cent of the original investment amount, i.e., 10 per cent of Rs. 100 and 10 per cent of the interest you earned in the first year, i.e., 10 per cent of Rs. 10. At the end of the second year, your Rs 100 would have grown to Rs 121. With regular investments, and as time passes, compounding can exponentially increase your wealth.
It inculcates discipline: Sometimes, it seems so much easier to spend on a new dress or on a holiday than to invest. However, if you have made a commitment to invest regularly, then you will always ensure that a portion of your monthly income is invested. Thus, regular investments inculcate discipline.
It helps you plan for your financial goals: Your financial goals could range from buying a car or funding your child’s education to buying a house and planning for retirement. Each goal needs to be achieved in a certain time period while ensuring that your investments adhere to your risk-reward requirements. Regular and consistent investing gives you visibility in terms of how your wealth can grow, in how much time it can grow, and the risk required to grow it. This is not possible in sporadic investing.
At the end of the day, we are all familiar with maxims like ‘little drops of water and little grains of sand, make the mighty ocean and the wonderful land’, or ‘Rome wasn’t built in a day’. Similarly, small and regular investments can help you create wealth over the long term.
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