Investing is an essential part of your financial planning process to achieve your envisioned financial goals. The most effective way of wealth creation is through investing your money in various avenues that could increase in value over time.

Making regular investments in worthy avenues instils the habit of saving and financial discipline in the long run; it encourages you to accumulate a corpus in terms of emergency fund that could be a safety net in times of need.

You don’t have to be the Wolf of Wall Street to begin investing; even if you have a small amount, start investing regularly. Further, you may gradually increase the size of your investments. If you start small and invest on a regular basis, you can amass a substantial amount of money over time.

As mentioned in an African proverb, “little drops of water make a mighty ocean”. So make every drop (small investment) count.

[Read: How Every Rupee You Invest Could Make a Difference to Your Goals]

Now, you must be thinking saving a certain amount every month could be sufficient. However, there is a difference between saving and investing. Saving entails depositing a certain amount in a secure instrument with predictable returns while investing entails putting the money to work in avenues that carry a certain risk to generate higher returns.

Although investment in market-linked products involves a risk-reward ratio, there is a basic principle for investing that you must follow to balance out market risk: always invest according to your risk tolerance, investment horizon, and financial goals.

Many individuals postpone beginning their investment journey until they have a huge surplus to invest. However, it is suggested that one should start investing from their first paycheque since there is no such thing as the right time to start investing. The trick is to be consistent with your investment regardless of the amount, huge or small.

One of the major concerns that investors’ planning to begin their mutual fund journey are facing these days is volatility in the equity market due to uncertain macroeconomic conditions. You see, markets are volatile by nature; we can’t control how these macroeconomic variables affect the market as investors, but one can take action to reduce their impact on the investment portfolio.

Investors should focus on the long-term approach while investing in the equity market rather than being tempted by the short-term blips. There is a method that can help investors save their wealth from eroding and even out the effects of a volatile market.

A Systematic Investment Plan (SIP) in mutual funds remains to be one of the wisest ways to invest in the equity markets and watch your money grow in the long run.

What is SIP in mutual funds?

A Systematic Investment Plan (SIP) is an investment route offered by mutual funds wherein an investor can gradually invest a fixed amount in a mutual fund scheme of their choice at regular intervals. SIPs in mutual funds offer several advantages to an individual investor, as listed below:

  • One can begin with minimum investment in mutual funds via SIPs with as low as Rs 500/- ;
  • It offers the benefit of the power of compounding and helps your money grow gradually over a period of time;
  • The rupee-cost averaging feature in SIPs reduces your cost of investment. It lets you buy more units when the market swings downwards and fewer units when it rises;
  • Instils a good financial discipline of making regular investments, regardless of the market conditions;
  • Allows flexibility to invest at your convenience with the help of online investment platforms and auto-debit facility from your bank account;
  • Most importantly, investment via SIP mode in mutual funds helps generate inflation-beating returns and mitigate the risk of market volatility.

Consequently, SIPs in mutual funds allow an individual investor to begin with minimum investment in mutual funds and work towards achieving the envisioned financial goals. SIP is an ideal way for retail investors to benefit from the power of compounding and create wealth in the long term. Timing the market is not easy; a Systematic Investment Plan (SIP) is the best way to ride out market volatility.

SIP Calculator

Let us understand, with an example, how making minimum investment in mutual funds via SIPs can make your money grow.

Mr A begins with a minimum investment in mutual funds via SIP of Rs 500/- on a monthly basis with an investment horizon of 10 years and an expected rate of return of 10% p.a.

Now, with the help of an SIP calculator, one can evaluate the amount that will be accumulated over time on the monthly SIP investments. All you need to do is enter a few details, such as the monthly SIP amount, the SIP tenure, and the compounded rate of return you expect from the mutual fund scheme in which you would be investing.

As per the above example, if one starts with a minimum investment in mutual funds via SIP of Rs 500/- what will be the maturity amount?…

[SIP Calculator]

The SIP Calculator is the most convenient and user-friendly tool to know the future value of your mutual fund investments. It will help generate the maturity amount of your investments within a split of seconds automatically with one click.

SIP Amount Rs 500/- (per month)
Investment Horizon 10 years (120 months)
Expected Rate of Return 10% p.a.
Total Investment Amount Rs 60,000/- (Rs 500 x 120 months)
Maturity Amount (on Completion of 10 Years) Rs 1,03,276/-

*This is just for illustration purpose 

As you can see, the benefit of the power of compounding that comes with investment via SIP mode in mutual funds helps investors grow and accumulate decent wealth in the long run, even with a small budget or minimum investment amount.

SIPs over a longer period of time will compound your wealth and have better risk-adjusted returns, so you should start investing as soon as possible to ensure that you remain invested for a longer period and watch your money grow.

[Read: 5 Important Factors to Weigh Before You Start an SIP]

Although you may find equities are high-risk investments as compared to fixed-income products, they are known to have the potential to generate high returns in the long run and help you build a large corpus, even with modest budgets.

As a result, one should start investing in SIPs as early as possible, even with a minimum investment and gradually increase the amount with time. Do note that wealth creation is a long-term process that survives the market volatilities in various phases, and the sooner you start, the more time you will have to gain from it.

How do SIPs perform across various market phases?

SIPs in mutual funds instil the habit of making regular investments, irrespective of the market condition, whether bearish or bullish. SIPs strive to lower the overall cost of acquisition by averaging out your costs amid market volatility.

However, when markets turn volatile, many investors begin to question their investment decisions and consider discontinuing their existing SIPs or liquidate them out of fear of losses. It is natural to panic in a volatile market when you see your investments in red. However, it is prudent to continue your SIPs, particularly in a falling market, because the same amount of monthly contributions will result in the purchase of additional units.

Having said that, volatile markets can also be viewed as an opportunity rather than a setback. By staying invested via SIPs in turbulent markets, investors can buy more units at low prices, and as markets turn favourable, one may receive fewer units due to an increase in valuations. In the long run, the SIP method acts as a shock absorber for your investment portfolio.

Graph 1: Starting a SIP at a Market High

Past performance is not an indicator of future returns
Data as on Aug 25, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

As seen above, as the market moves higher, the subsequent investments of the SIP are made at a higher NAV, increasing the purchase cost. As the market becomes favourable, the lump sum investment generates a higher gain.

[Read: Market at All-time High: How to Select the Best Mutual Funds for SIP Investment Now?]

If you started an SIP at a market bottom phase, your subsequent investments would have come at a higher cost. Hence, a lump sum investment may perform better in a bullish market phase. However, bear in mind that investing a large sum of money at one go is a high-risk proposition and may not always gain profits.

Here’s the caveat – if you could identify market bottom or market peaks, you would now be sitting on tons of extra income. However, not even seasoned investors and/or market experts are able to predict with conviction about where markets are headed.

The Sensex recently hit a peak of 67,000, while Nifty crossed the 19000 mark. Could anyone have predicted that the market would touch this level? One could employ market-timing strategies, but they may not always work.

Now, what if the market corrects or there is a bearish phase?

As we all know, the pandemic period in the year 2020 was a turbulent phase for the Indian equity market. However, the market quickly bounced back from its March 2020 lows, which were brought on by the uncertainty surrounding the COVID-19 pandemic. This was a shorter bear market phase as compared to the turbulent market during FY 2015-16.

The bear market was the result of turbulent equity movement, dismal corporate earnings, sub-normal monsoons, plunge in commodity and oil prices along with surprise interest rate cuts, and so on.

Graph 2: Starting a SIP in a Bear Market or Volatile Market

Past performance is not an indicator of future returns
Data as on Aug 25, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

During uncertain market conditions, an SIP would surely be a wiser choice as compared to investing your corpus as a lump sum.

If the market becomes volatile or corrects from its current level, the inherent rupee-cost-averaging feature of SIPs will take care of the intermittent volatility. More units will be added during the corrective phase of the equity markets, and when the market begins to ascend again, it would compound your wealth.

However, keep in mind that SIPs do not always beat lump sum investments. If the markets do not work in your favour and your SIP yields unsatisfactory results, do not get dismayed. You can even use market volatility as an opportunity to add more units at a lower cost.

It is important to keep a long-term investment horizon of 5-7 years or more, even if you are investing via a SIP. Compared to a lump sum investment, the returns may be a few percentage points lower with SIPs, but they will still be adequate to accomplish your financial goals.

To conclude…

With the several benefits that SIP offers, it proves to be a rewarding strategy to watch your money grow by making minimum investments in mutual funds. While some entities promote SIP as a Safe Investment Plan that eliminates market risk and helps you achieve your target by generating above-average returns, remember that SIP is not free from market risk.

As mentioned earlier, SIP is just a route for making minimum investments in mutual funds and building a wealthy corpus to achieve your financial goals.

[Read: Are You Investing in the Right Mutual Funds? Think again!]

You may attain your long-term financial objectives sooner by starting an SIP in worthy equity mutual funds, which could provide significantly better returns than traditional investing options like recurring deposits, PPFs, etc.  Depending on your suitability, you may consider choosing to invest in the best mutual fund schemes.

This article first appeared on PersonalFN here

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