How Mutual Fund SIPs Lead To Disciplined Wealth Creation

Investing in mutual funds via the systematic investment plan (SIP) route is a phase of ever-increasing popularity. Consider the fact that there are 10.12 crore SIP accounts as of October 2024, according to data from trade body AMFI. Assets under management via the SIP route are now worth Rs 13.3 trillion – almost 20% of the total mutual fund industry AUM. Monthly SIP instalments have crossed Rs 25000 crore in October 2024, up more than doubling in the last 2.5 years.

Beyond the macro numbers, the real strength of SIPs is in creating wealth at the individual level via long-term and consistent investing, thanks to the power of compounding.

Goal planning, choosing the right schemes by taking the right assistance, sticking to the funds for years or decades and stepping up investments with rise in income are some key steps to achieving generational wealth via SIPs.

Systematic Wealth Generation

The fundamental trait to make SIPs work for you is to remain disciplined and goal oriented. Taking the help of a certified financial advisor or a mutual fund distributor is very important if you do not have the knowledge and time to manoeuvre market-linked investments. This move will help you avoid costly mistakes and align your portfolio with your goals.

As a first step, you must decide the amount of money you wish to accumulate as a first step to wealth creation. Most importantly, you must consider inflation while calculating the corpus as price-rise eats into the purchasing power of money.

The second step is to decide how much you will need to invest to reach your target. This will require making assumptions regarding the returns that you are likely to generate from your mutual fund investments.

For example, to achieve a corpus of Rs 5 crore in 20 years, you will need to invest a little more than Rs 50,000 every month, assuming 12% annual returns.

The third step is to decide the funds in which you will invest via the SIP mode. Depending on your time horizon for goals, risk appetite and available surplus, you can choose from equity, debt, hybrid and commodity (gold, silver) funds or a mix of these to reach your intended financial target.

A goal that is just a year or two away will entail investing in debt funds. For a medium-term horizon of 3-5 years, hybrid and perhaps large-cap funds can be suggested. For long-term goals of 10-15-20 years, flexi, mid and small caps as well as gold funds can be considered.

The fourth step is to allocate the SIP amount smartly across different categories to make the most of the options available, based on your requirements.

A core-satellite approach to portfolio construction and asset allocation decisions can be taken with expert advice from professionals as indicated earlier.

Remaining invested across market cycles and sticking to funds without too much of chopping and changing (barring due change of scheme character or prolonged underperformance etc.) for, say, 10-plus years can work wonders due to compounding.

Even in falling and volatile markets, you must never stop or pause your SIPs as they help you in averaging your investment costs.

The final step is to step-up SIP investments. You can start small and increase your SIP instalments over the years.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature