3 things you need to know about Monthly Savings Plans
Individual investors often face a bewildering range of options. You can keep your savings absolutely secure by making voluntary contributions to your central provident fund account or by deploying your money in government savings bonds. But these investments yield low returns.
The stock market can provide an opportunity to grow your money much faster. However, most people do not want to bear the risk of deploying their funds in individual stocks. There are simply too many factors that could negatively affect the market price of a company’s share.
Economic conditions may deteriorate or the industry that a particular company operates in could go into a slump. If you put your savings into the shares of a company, you have to be prepared for the possibility of your principal amount getting eroded.
But there is no getting away from the fact that the stock market provides one of the most consistent returns among all investment options. The S&P 500 index has given an average annualised return of over 14% in the last five years. Even if you consider a longer time period of 10 years, the return is still a respectable 7%.
How can an individual investor benefit from the gains that can be made in the stock market? Is there any way to earn the returns that company stocks can provide while exposing your money to a minimum level of risk?
Monthly savings plans are a good option
Also known as regular savings plans (RSPs), these financial instruments can help individuals meet their long-term wealth creation goals in a relatively safe manner.
How does an RSP work? The concept is very simple. You provide instructions to your bank to allow a fixed sum to be transferred every month to a fund that buys a number of stocks with your money. Your monthly investment can be as low as $100. This allows even investors who do not want to deploy large amounts to participate in the scheme.
The fund pools the money of thousands of investors and buys those stocks which have the greatest potential to appreciate in value.
Advantages of Monthly Savings Plans
It is common knowledge that stock market valuations fluctuate over time. If you buy into the market when valuations are low, you can expect to make higher returns. Conversely, if your purchase is made when prices are inflated, you may see your investment losing value.
Most investors cannot time the market to take advantage of these swings in prices. There are simply too many factors at play and your projections are at least as likely to be wrong as to be correct.
RSPs address this issue particularly well. As your investment is made on a regular basis, you would be buying stocks when prices are low as well as when they are high. Consequently, over the months and years, your acquisition costs will average out, allowing you to register gains even when the market has been volatile.
The principle of “dollar cost averaging” described above is one of the main advantages of a monthly savings plan.
Saving in this manner provides other benefits too. On a fixed date every month, the amount that you have specified will be automatically invested on your behalf. You do not need to transfer money yourself. This results in a disciplined form of investing where you are buying into the stock market regardless of the level at which it is.
Does a monthly savings plan carry any risks?
Like all investments in the stock market, a monthly savings plan can be risky as well. Let us examine how you could lose in this form of investment.
Take a situation where the fund that you have invested in buys shares of companies which see a consistent fall in value. In this scenario, averaging the purchase price will not help. The value of your savings will fall along with the decline in share prices.
Of course, it is unlikely that every share that your fund buys will see a reduction in value.
Here’s one example of a fund that can be invested as a monthly savings plan
Lion Global is one of the largest asset managers in Southeast Asia. It currently manages $42.5 billion for its clients. The company is a member of the Oversea-Chinese Banking Corporation (OCBC) group, a leading Singapore bank.
Lion Global’s recently launched LionGlobal Disruptive Innovation Fund (LGDIF) offers investors a unique proposition. It plans to deploy the money it collects into disruptive companies. Disruptive companies change the traditional way an industry operates, especially in new and effective ways. The fund’s holdings may include Softbank, Facebook, Amazon, and Tesla Motors.
Investors can make a beginning by investing amounts as low as $100 per month.
Who should invest?
RSPs like the LGDIF offering are ideal for individuals who have some risk-taking ability, but do not have the time and inclination to research individual stocks. While it is true that such funds can see a drop in value temporarily, their long-term prospects can be reasonably good.