Systematic Investment Plan- The Game of Compounding
“Brick by Brick… a castle is built, likewise SIP by SIP… wealth is built”. One may find the above quote bit blunt but its true. The hidden mantra for this wealth creation is Compound Interest. Compound Interest is the eighth wonder of the world. He who understands it earns it…he who doesn’t pays it. So the skill is Investing, but its secret is Time, that’s how Compounding works….
Investment in SIP
promotes saving as it is focused on the philosophy of “Save First, Spend Next”.
Due to rising inflation and personal expenditure one should strictly spend what
is left after saving and not save what is left after spending.
Lets have a look on what is SIP?
SIP is a facility offered by mutual funds to the investors to invest in a disciplined manner. The plan refers to making equal investment at regular interval of time in a particular asset. The regular interval can be quarterly, monthly, weekly or evenly daily. One can even start investing in SIP with as low as Rs. 500/- per month.
However whenever it comes to SIP, one common question which comes to investors mind is- This investment via SIP in any of the mutual fund is directly linked to equity market, so won’t we face the risk of loosing money during the bear market??
Mutual Fund Houses invests these funds collected from investors in equity markets and based on past track records, for a long term perspective equity market has always created wealth. One also need to understand the fact that in SIP your money is distributed over a timeline of period which helps in better rupee cost averaging. So falling equity market should be taken as a boon as more units can be purchased due to lower NAV.
Now-a- days Stock Markets
are all time high, so what is the best time to invest in SIP?
The
best time to invest your money was 20 years ago and the next best time is now. Even
Warren Buffet cannot make exact prediction of stock market then who are we? SIP
investments can be started ANYTIME. As SIP has structured investment spread
over numerous years, so we definitely get the benefit of rupee cost averaging.
Hence, there is no suitable time frame within which an investor should start a SIP
investment plan, the sooner the better.
Lets have a look at an
illustrative example of how starting
early SIP can prove beneficial:
There are two college
friends, X and Y. They are both 23 years of age and are both planning to retire
peacefully with a sizeable portfolio at retirement. X is very diligent in with
his investment decisions and decides to invest Rs. 5,000/- every month for next
30 years. Whereas Y on other hand finds it difficult to save his money as he
spends most of his money in latest gadgets and parties. But once he realized
his mistake he decides to double down the investment by putting Rs.12,500/-
every month using the same SIP for next 16 years.
Here’s how their both
portfolios would look like after 30 years.
From the above it can be observed that Mr X has built a corpus fund of approx. 92 lakhs whereas Mr Y was left with corpus fund of approx. 54 lakhs. Despite Mr Y investing 2.5x more than Mr X was left with lesser corpus by approx. 38 lakhs (i.e. 41% lesser than Mr X corpus fund).Thus from the above calculation it is very prudent decision to start your SIP as soon as possible.
No lets take a different
approach, that Mr X also decides to invest Rs. 12,500/- every month for 16
years only but starting today. The portfolio value after 30 years will be as
under:
From the above it can be observed that same monthly investment, same period of payments but starting with early investment has helped Mr X to multiply his corpus 3x than Mr Y.
To
Conclude:
SIP helps you to generate
habit of Save First, Spend Next. If you haven’t started your investment journey,
then starting an SIP would be worthwhile considering it. No one can understand
your own risk appetite that by yourself, so evaluate your risk and choose your
SIP in Equity, Debt or Hybrid Funds accordingly. Then what are you waiting for….Start
your SIP journey today itself. Just remember- You Work for Money is EMI whereas money works for you is SIP.
Keep sharing, Keep gaining.
By CA Dhruval Shah
You may reach out to me at dhruvalcshah@gmail.com.
Disclaimer: The above blog is for knowledge purpose only. The author will not be responsible for any investment gains or loss, do consult your investment advisor before taking any investment decisions.
I think the examples are well thought and it gives away the conclusion well.
ReplyDeleteGood content Dhruval Keep it up!!
Insightful!
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