LET’S PLAY A FINANCIAL GAME
SUPPOSE YOU ARE INVESTING RS 1000 EVERY YEAR INTO AN INDEX FUND FOR 5 YEARS
WHICH CONDITION WILL GIVE YOUR BETTER RETURNS
CONDITION 1
1) 1) THE INDEX STAYS AT RS 100 PER SHARE FOR THE FIRST YEAR.
2) 2) IT GOES DOWN TO RS 60 THE NEXT YEAR.
3) 3) IT SAYS AT RS 60 THE THIRD YEAR.
4) 4) THEN IN THE 4TH YEAR, IT SHOOTS UP TO RS 140
5) 5) IN THE FIFTH YEAR, IT ENDS UP AT RS 100, THE SAME PLACE WHERE YOU STARTED.
CONDITION 2
1) 1) THE INDEX IS AT RS 100 THE FIRST YEAR
2) 2) RS 110 THE NEXT YEAR
3) 3) RS 120 THE THIRD
4) 4) RS 130 THE FOURTH
5) 5) RS 140 THE FIFTH YEAR
SO, WHICH OPTION YOU WILL CHOOSE FOR MORE RETURNS? |
I KNOW
MOST OF YOU WILL CHOOSE 2NDCONDITION FOR GOOD RETURNS.
COMPLETELY WRONG
TOTAL INVESTED MONEY IN 5 YEARS = RS 5000
IF YOU CHOOSE CONDITION 2
YOUR RS 5000 TURNS INTO RS 5915
IF YOU CHOOSE CONDITION 1
YOUR RS 5000 TURNS INTO RS 6048
CONDITION 1 WILL GIVE YOU MORE RETURNS THEN CONDITION 2
IN CONDITION 1 :
EVEN AFTER 5 YEARS INDEX VALUE IS RS 100, NO GAINS. BUT THROUGH SIP YOU TAKE THE ADVANTAGE OF HIGH VOLATILITY.
IN CONDITION 2 :
WE CAN CLEARLY SEE, THAT 5 YEARS IS A PERIOD OF BULL MARKET SO, LUMPSUM WILL BE BETTER OPTION THEN SIP.
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