Why SIPs Are A Perfect Tool To Create Long-Term Wealth

What if we tell there was a sure-shot formula to create wealth? You must be thinking that it is a joke. You might say that if it existed, we would all be rich. The approach we are talking about is Systematic Investment Plan (SIP). This is an investment route wherein investors can make a pre-determined investment at regular intervals in a mutual fund. When you continue investing in mutual funds in a disciplined manner, it can lead to wealth creation in the long run.
Here, we will look at the various benefits of investing in a mutual fund through SIP and how wealth is created over the long term.

Flexibility to Start Small

Do you have only Rs.100 to invest every month? Don’t worry. You can start investing in mutual funds through SIP for as low as Rs.100. This means one need not wait till a sizeable amount is put together to start investments. This also means there is no excuse to postpone investments. Th beauty of SIP is that one can start small and keep increasing the amount as the income increases over the years. This simple technique done consisitently over decade can help create sizeable wealth.

Convenient Method

One of the main reasons why SIP is so popular amongst investors is the convenience that SIP offers. For setting up SIP, one needs to select a preferred date, the mutual fund scheme to invest into and the amount. This amount will be deducted automatically from the assigned bank account on the preferred date. This setup ensures that the SIP investment continues on an auto-pilot mode, without requiring any conscious step from the investor’s end.

Rupee Cost Averaging

When investing through SIP over several years, one the advanatges is that the investor gets the benefit of rupee cost averaging. What this menas is that when investing ina an uptrending market, the investor gets lesser units and when investing through market downturns, one gets more number of units. As a result, by staying invested through market ups and downs, one gets to average the cost of investment.

Protection from Market Volatility

Market volatility is part and parcel of equity investing and consequently mutual fund investing. In this journey, one of the often made mistake is taking impulsive decisions to stop SIPs based on the current market trends.  This is injurious to walth creation. The best way to avoid such reactions is by investing in mutual funds through SIP. This will keep investors from taking impulsive actions, thereby reducing the probability of taking actions which are detrimental to one’s financial health.

Power of Compounding

When you invest in mutual funds, the returns generated by the fund get reinvested in the fund, which leads to a compounding of returns. As a result, the longer you stay invested, the higher will be the impact of the power of compounding. Let us considera an example to understand the potential of SIP in wealth creation over 15, 20, and 30 years.

Suppose an investor is investing Rs. 5,000 per month through SIP for 15 years, and the expected average annual return is 12%. At the end of 15 years, your investment would have grown to over  `25 lakhs. Now, if you continue your SIP for another five years, i.e., 20 years in total, the total value of your investment would have grown to around  `50 lakhs. Keep investing for another 10 years, and you will have accumulated around `1.76 crores. This example shows the power of consistent investment in creating wealth over multiple decades.

Goal Based Planning

Through SIPs, an investor can achieve various financial goals like child’s education, marriage, retirement planning, etc. For each of thes goals, start an SIP and tag the financial goal to it. Do not make the mistake of pausing or stoping SIPs along the investment tenure.  Also, as and when one wishes to increase the SIP amount, there is an option of SIP Top-up which will ensure the SIP amount keeps pace with your increase in income and reach your goals faster.

To conclude, SIP is  a simple tool with which every individual can meet their various financial goals in a simple, systematic and a discipline manner. However, while at it, it is imperative that one has to be patient in this journey to reap maximum benefits.

Naveen Khullar, Founder & Owner, Bachat Nivesh

Disclaimer

The views are personal and are not part of the Outlook Money editorial Feature.