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Simply Incredible Profits = SIP

Remember the story about the race between the hare and the tortoise? The hare ran very fast but lost out because he decided to take a break. The tortoise won because although he was slow, he moved steadily towards his goal. Investing is no different. You may invest in a lucrative avenue but if you stop midway, you may miss out on the rewards.

And what fantastic rewards they have been. Systematic investment plans (SIPs), where a fixed amount is invested in the scheme of your choice on a pre-determined date of each month, have yielded phenomenal returns. Here is a simple calculation. if you had started investing Rs 1,000 every month in the Magnum Contra fund in January 2002, your investment was be worth Rs 2.8 lakh today, an annualized return of almost 40 to 45%.

Many people fall into what can be called the lump sum trap. They feel that Rs 1,000 a month is too puny an amount to be invested and wait till they have amassed a sizeable sum to invest. But that can dent your returns quite badly. For instance, if instead of making monthly investments of Rs 1,000 you had waited till the end of each year to invest Rs 12,000 in a lump sum in the Magnum Contra fund, your investment would be worth only Rs 2 lakh. That’s an opportunity loss of Rs 80,000.

Then there are those who are too preoccupied or just plain lazy to write out a cheque every month or so. For them, SIPs are a godsend opportunity to make money. The money is debited from their bank account on the given day and invested in the fund. No filling up forms. No going to the broker. No trying to time the market.

That, in fact, is the bane of many investors. They wait in the hope of entering at the “right time” so that they can maximize their returns. They forget, however, that it is not the time when you enter the markets but the time you spend in there that determines your returns. Longer the tenure of the investment, the higher the returns.

Investing is a rewarding but difficult habit. How can you save when there is so much to spend on—new gizmos, trendy clothes, great restaurants, shopping malls, holiday offers…. The profusion of plastic money has only facilitated the spending habit, giving a quiet burial to many a financial resolution.

Hope emerged when the Budget of 2005 removed the sub-limits on tax saving investments. Investors were freed from the dictates of the government on how much to invest in which investment option. This change in the rules brought tax planning funds into the limelight.

For people who find it difficult to save, here was an opportunity to make a fortune through tax savings. If a person invests the entire Rs 1 lakh under Section 80C in ELSS funds, his name might figure in the list of crorepatis 20-25 years from now.

There is one caveat, though. Investors can pick any fund depending on their expectation of returns and the level of risk they are willing to take. But long-term investors need to keep one thing in mind: equities yield higher returns than any other investment avenue if held for the long term. You can never go wrong if you have invested in a good diversified equity fund. If you are unnerved by the daily gyrations of the stock markets, invest through SIPs.