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How to Use Recurring Investment Strategies to Build Wealth?

dateKnowledge Centre Team dateNovember 17, 2021 views230 Views
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There is no rocket science behind building wealth. All you need to do is to understand the power of compounding. Your regular savings plans can gradually multiply into a sizeable corpus due to the compounding interest applying to them. Various practical investment approaches can help you grow your wealth. One of them is recurring investments strategies.

A recurring investment is a type of activity where you can invest a fixed amount of money into a particular investment plan. Investment plans which allow recurring investments also help you build wealth at your own pace.

Five Benefits of Recurring Investment Strategies

A recurring investment strategy has many benefits. Some of the prominent benefits include:

i. Simple to Follow

The most obvious benefit of making recurring investments is they are very convenient. You just need to save a fixed amount from your monthly income and invest it in one of the investment plans that is suitable for you as per your risk appetite.

ii. Maximizes your Savings

Evidently, the recurring investment strategies encourage you to save more. Besides, they maximize your savings at a compounding rate of interest. The small, fixed sums that you invest in the recurring investment plans may gradually multiply into a substantial retirement corpus one day.

iii. Maximizes your Investments

Recurring investment instruments such as equity or debt mutual funds maximize your investments at an exponential rate as compared to low-risk investments such as bank FD or PPF.

iv. Maximizes your Tax-saving

There is no rocket science behind compounding wealth. If you save regularly over a long period, you will be able to maximize your savings corpus in the long run.

If you invest more savings into various tax-saving instruments such as ULIPs, NPS, ELSS, PPF, etc., you can claim tax deductions on them u/s 80C of the Income Tax Act. This way, you can maximize your tax savings.

v. Rupee Cost Averaging

Another major benefit of recurring investment, particularly SIPs is the Rupee cost averaging.

What is Rupee Cost Averaging?

Rupee cost averaging is the key benefit of any recurring investment strategy. This benefit is more useful in the case of high-risk or volatile investments like equity stocks or funds.

Rupee cost averaging refers to the resulting average purchase price as you continue to invest the same amount at different fund NAVs. As you receive fewer units at higher rates and more at lower rates, your overall average cost comes down.

Your aim is to eventually get the average cost of your fund units lower than the average price (NAV) of the fund. This way even in a level market, your portfolio will remain profitable.

Also, you can avoid the complex or even impossible duty of trying to figure out the exact best time to invest.

How Does Rupee Cost Averaging Work?

Rupee cost averaging works best in volatile investment plans like equity funds. For example, have a look at the table below:

If you invest in an equity fund through SIPs here’s how your unit allocation will work:

Month SIP Amount (₹) Fund NAV Units Received Portfolio Value
Jan-20 2,000 100 20 2000
Feb-20 2,000 50 40 3000
Mar-20 2,000 100 20 8000
Apr-20 2,000 50 40 6000
May-20 2,000 100 20 14000
Jun-20 2,000 50 40 9000
Total 12,000 180

The average NAV of the Fund in the past six months: Rs 75
The average NAV of portfolio: Rs. 66.67

Thus, the average cost of the portfolio goes below the market average. This gap will continue to increase as you continue the SIP into the fund.

Rupee Cost Averaging | Inflation

Rupee cost averaging ensures that your portfolio value keeps increasing even when the market remains stagnant.

Recurring Investment Strategy in ULIPs

ULIPs have features to allow recurring investment for every investor. Whether you want to invest monthly, quarterly or annually, if you invest in ULIP you have the option of a recurring investment strategy. Here’s how:

i. Monthly Premium Payment

ULIPs allow you to invest your money in different modes including monthly. When you choose the monthly premium payment mode, you automatically receive the benefit of recurring investment, i.e. rupee cost averaging.

Also, even if you are allocating all your investment to a debt fund in ULIP, you can receive the same tax benefits.

ii. Systematic Transfer Option

Canara HSBC Oriental Bank of Commerce Life Insurance Invest 4G comes with a Systematic Transfer Option. This option allows you to benefit from the recurring investment strategy even while you are investing in a lump sum.

For example, if you can only invest once a year, the systematic transfer will ensure that your funds are allocated to equity funds as SIP.

Under this option, your entire annual premium will be allocated first to a liquid fund in the policy. Afterwards, the units in the liquid funds will be systematically transferred to the equity funds you chose. The transfer occurs every month over the next 12 months. Thus, about 1/12th of your annual allocation to equity fund will be invested in the equity fund, same as a monthly SIP.

Your Fund Value available in the Liquid Fund at the start of every month shall be transferred to the 'Target STO Fund' by cancelling Liquid Fund units and purchasing units in the 'Target STO Fund'. This will continue till the availability of your Liquid fund units.

These are some of the ways how a ULIP can work as one of the best recurring investment strategies.

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