Unlike the developed economies, people in India prefer to save than to spend. Whether putting our savings in a Fixed Deposit or Public Provident Fund (PPF) or cutting down expenses to manage a home loan EMI, savings is all that we do. But is this saving enough to meet future expenses, especially when most saving instruments may at best get you 8% to 9% return, and inflation is 4%-5%?
What you save from your monthly salary is just not enough to meet big ticket expenses of the future like education of children, their wedding, your retired life, etc. It is imperative to put your savings into investment avenues that can grow manifold over the long-term. The best way to achieve this is through disciplined and regular investing.
SIP or Systematic Investment Plan offered by mutual funds is a great way to start investing regularly, even if the amount is small, and gradually build wealth in the long run.
SIPs have become popular with regular investors for a variety of reasons. Here is a list of positives that you just can’t afford to ignore:
1. Cheaper on the wallet as one can start a SIP with as low as Rs.500 per month
2. Diversification is possible even with a small amount of investment
3. Investing through an SIP makes market timing irrelevant by ensuring that one invests at all points of times (highs and lows) in the
market thus averaging out the per unit cost
4. Benefit from the power of compounding over longer periods of time
Now let’s look at some the distinguishing benefits of SIPs in greater detail.
All mutual funds have an element of risk attached to them as they invest in market related instruments. However, when you invest through SIPs in mutual funds, you can beat market volatility effectively through rupee cost averaging. This means you buy more units when NAV is low and lesser units when NAV is high. In the long run, if the market has gained, the average cost of units tends to be lower than the prevailing NAV. For example, if you invest Rs 1,000 per month, you get 100 units if the NAV is Rs 10 and 200 units if the NAV drops to Rs 5. Over longer periods of time, the average price per unit will fall if markets move in both directions, thus helping to lower volatility of returns as well.
One can create wealth by investing in SIPs in small amounts for longer periods of time and benefit from the power of compounding. What this means is that the return you make in the first month gets reinvested into your principal (monthly SIP amount) in the second month and this continues over many years thus enhancing the value of your investments. The longer you remain invested in SIPs the more you can benefit.
Hence investing in the markets through SIPs in mutual funds over the long term can help you accumulate wealth.
Let’s look at a simple example to illustrate this. Suppose you invested Rs.1,000 per month in an equity fund at 8% compounding rate per annum for 20 years, the final amount you would get is Rs.5.89 lakh on a principal of only Rs.2.40 lakh (Rs.1000 X 240 months). The same SIP if extended for another 5 years to a 25-year time frame gives a final amount of Rs.9.51 lakh indicating the power of compounding over longer periods. The principal invested over 25 years is only Rs.3 lakh. (This example is just for reference purpose and should not be taken as an absolute value. Returns in Mutual Funds are not fixed and there’s no guarantee.)
There is no specific time to start a SIP. The earlier the better. The longer the better. SIPs are the answer to a common man’s financial goals.