Benefits of Investing in Auto Mode
Making Investments from your savings is a good thing as it lets you grow your money over a long period along with beating inflation. Investors have two choices on how much & when they can invest. One option is to invest with the money that is left at the end of the month after all the expenses. Most new investors follow this method only to realize later in their financial life, that it hasn’t really worked for them.
Investment = Income - Expenses
Unfortunately, one of the biggest disadvantages of doing this is that investments are undisciplined and ad hoc. Some months there will be a surplus to invest, while in other times you will be left with nothing at the end of the month because you decided to splurge on unnecessary items.
The other method that is followed by the more seasoned investors is as follows:
Expenses = Income - Investments
One of the best methods to follow this approach is to invest in auto mode. Auto mode investing is explained further in detail.
Investing in Auto Mode
Auto mode in this case implies automatic mode. In other words, the method of investment should in no way be intervened with human emotion. One of the best ways of following this practice is by investing through a SIP or Systematic Investment Plan.
Systematic Investment Plan
A SIP is a method by which an investor can invest a certain amount of money in a regular disciplined fashion. For example, an investor may choose to invest every month in an Index fund for the next 2 years. In this case, the investor can decide the amount and date for the payment. It is best to choose a date which falls 2 or 3 days after the date of credit of salary. On the given date, the predetermined amount would be debited from the investor’s bank account and invested in the index fund.
Instead of choosing a monthly option to invest, investors may also select weekly or quarterly options.
Advantages of Investing in Auto Mode
In today’s article, we have listed down the benefits associated with investments made in auto mode by way of SIP:
- Develops the habit of savings: Investing in auto mode at the start of month creates a habit of saving. Since the specific amount gets automatically deducted from your bank account every month, it inculcates a good habit almost by force. After a few years, you would realize that you do not even need to be on auto mode. The benefits of saving and investing will drive you to start saving more.
- Brings discipline to all aspects of life: It is said that “self-discipline starts by making your bed first thing in the morning”. And this is a habit widely followed by most successful people. The reason is that when you start by doing a successful chore early in the morning it gives you a sense of pride. This makes you want to achieve more. A disciplined form of investment does much the same. The creation of wealth over time instills a sense of achievement and it pours over to other aspects of your daily life.
- Rupee Cost Averaging: Auto mode investing gets you to invest during every cycle of the market, i.e. when the markets are up, down or stable. This helps to purchase more units of a fund when they are available cheaply and less when they have high prices. This kind of purchasing lessens the impact of volatility and keeps the portfolio returns more stable.
On the other hand, if a Lump-sum investment is made you can only buy the units at the current price. As it is very difficult (if not impossible) to time the markets, you can never be sure if the markets will rise from that point or fall.
This process of being able to purchase more units at lower levels and vice-versa is known as Rupee-Cost Averaging. This process makes your investments less risky & volatile.
Avoiding unnecessary expenses: Investing by way of a SIP helps to avoid unnecessary expenses that you may have incurred when you decide to invest or save with the leftover money at the end of the month. It is normal human nature that when you have surplus funds available, you tend to spend on items which may not be required. As they say money finds a way to flow just like water.
Specified amount in savings at the start leads to the control of expenses one makes.
Helps achieve long term goals: It helps to achieve one’s long term financial goals through a disciplined environment of savings. Regular monthly savings brings you close to your financial goals when you follow the “Savings First” rule religiously. It also doesn’t create stress or financial burden as the sacrifices are only of luxuries and they are well spread out.
Auto Mode Investing at the start of the month forms a disciplinary habit of savings which is very beneficial for meeting your financial goals and managing your money well. It is probably one of the best methods to go about securing your future in an easy manner.
Q1. How much should I invest in SIPs?
Ans. The amount that an individual invests depends completely on your risk-return profile and financial goals. As a rule, you must make sure that you are investing at least 20% of your income. However, as the income grows, the proportion towards savings must also increase.
Q2. Where should I invest my SIP amount?
Ans. For retail investors one of the best investment vehicles are mutual funds. There are various types of mutual funds such as equity, debt, hybrid, gold and others. In order to decide which of these you should choose depends on your life-stage. You can see this video on asset classes for a better understanding.
Q3. What is the expected return from SIPs?
Ans. The expected return from SIPs depends on the asset class you choose. However, it has been observed that debt funds can offer you anything between 6 and 9% per year. On the other hand, long-term SIPs in equity funds have offered upwards of 12 %.