An incremental approach for wealth creation

Whenever there are surplus funds, salary hikes or bonuses, people often end up keeping them either idle in bank accounts or spend recklessly.

Why not utilise this money to build a bigger wealth kitty? You must be wondering how would you align it with your on-going Mutual Fund investments!

Well, you can always make an ‘Additional Purchase’ in your existing schemes, i.e., follow an incremental approach to investing. While a systematic investment plan (SIP) has emerged as one of the most suitable ways to invest in mutual funds, what if there is an opportunity to buy more units at lower prices beyond your scheduled SIPs?

Markets tend to move in cycles and present buying opportunities to investors from time to time. Therefore, in case of mutual funds, even if you are running an SIP account, nothing stops you from investing as and when your finances afford that liberty to you.

It is similar to accumulating shares when the price falls, thereby lowering your average cost of purchase.

Let’s understand this in detail:

For instance, you start an SIP in an equity mutual fund scheme with a monthly installment of Rs 2,000 which debits your bank account on the 10th of every month.

After looking at all your expenses and liquidity needs, suppose you have a surplus amount of Rs 5,000 on any given day during the month, and the markets are showing downward movement too.

You can invest this sum in addition to your SIP on whichever day you want. It will not affect your running SIP.

Savvy investors opt for such purchases especially on days when the value of the underlying securities - like stocks or bonds - go down significantly.

How does additional purchase help investors?

Let us continue the above example. Your SIP of Rs 2,000 has an investment horizon of 20 years (240 months). You may plan to utilise it for your child’s higher education needs or daughter’s marriage or other long-term goals.

Through this SIP, you will end up investing a cumulative sum of Rs 4,80,000 during the investment tenure. As your investment horizon is long-term, your portfolio will be subject to several market cycles, i.e., there could be years of volatility, weakness, consolidation, and boom.

So, additional purchases will not only help you to reduce the overall cost of investment but also increase your cumulative sum invested.

Of course, an inherent emotional bias or panic on market declines could make it a difficult choice for you to invest on dips. But the ideal investment mantra is to ‘Buy Low & Sell High,’ and this applies to all asset classes including equity.

In short, it is a wise decision to keep purchasing units with surplus money whenever market declines. In the long run, this strategy could help you create sizeable wealth for your goals.

Sometimes, you may be running a tight schedule and find it challenging to monitor markets on a day-to-day basis.

Your financial advisor can help you here. Share your preferences regarding additional purchases such that your advisor can alert you in case of buying opportunities. Remember, ‘investing in dips’ will reward you significantly due to compounded nature of returns in the long term. A core SIP portfolio with a flavour of ‘additional purchases’ makes you a smart investor.

(The writer is MD and CEO at Axis Mutual Fund)