Mutual Fund SIP investments were introduced in India in the late nineties. Over the last two decades, investment in mutual funds via SIP investments is becoming a popular investment choice for investors in India.SIP investments offer a lucrative choice to retail investors. It allows accumulation of wealth by investing small sums of money on a weekly, monthly or quarterly basis. To invest in mutual funds through SIPs an investor needs to be able to investment a minimum of Rs 500 per month. Hence, the workings of SIP can be compared to a recurring deposit, except that mutual funds are market linked investment options and thus generate market linked returns which are,though higher but can be very volatile as well.
SIP investments, being market linked products,are known to generate excellent returns and create wealth for the investors over a long investment horizon.
For example – Rs 5,000 monthly SIP investment in HDFC Tax Saver Fund over the last 15 years would have created a corpus of more than Rs 38 Lakhs against investment of just Rs. 9 Lakhs (in 15 years). The annualized internal rate of return (IRR) of the SIP investments over 15 years was more than 17.52% (Period of SIP investment – 1st April 2003 to 1st March 2018. Current values based on NAV dated 15/3/18)
There are a number of advantages SIP investments as we can see below –
Convenience of investing: The idea of having to invest money every month may sound like a tedious process. However, in SIP investments makes it easy by allowing investors convenience and ease of savings. During the submission of documents while starting the SIP investments, investor has to submit an auto debit form (ECS mandate). The auto debit mandate will ensure that the SIP amount you wish to invest every month gets debited on the date of debit chosen by the investor.Therefore, monthly SIP investment becomes hassle free for the investor.
This process continues till you wish to stop the investment. SIP investments ensure that instead of your money remaining idle in bank account or getting spent, you stay invested and also get market linked returns. By investing your savings on a regular basis through SIPs, you are putting your money to work to make more money.
Makes the market timings irrelevant: The rise and fall of the stock market is always subject to speculation and despite that it cannot be predicted accurately. SIP investments make such speculation and market timings irrelevant. As an investor, you are investing every month, some months may be high points in the market and some months may be low points. Investing in both high and low points evens out the risk and the returns are generated on an average of market performances. This is called Rupee cost averaging which states that an average of returns is generated by taking the lows and the highs of markets.
Flexible instruments of investment: SIP investment offers flexibility to its investors. It levies no restrictions and penalties on regular SIP payments and withdrawals. No penalty is levied on investor if the SIP amount is not debited from your bank due to insufficient balance. However, if you are investing with the idea of long term investment and creating wealth, maintaining balance is paramount to the purpose. In case of insufficient balance, three times or more, generally your SIP investment will automatically get stopped.
Option of partial redemption: The investors have the option to redeem partially from the SI{ investment, in case liquidity is required for an emergency. This option can be exercised in open ended funds and units can be redeemed partially, while the remaining units stay invested. Equity mutual fund schemes usually have exit load periods e.g. 12 months, 18 months and so on. If you redeem your units within the exit load period, a penalty on the fund value may be charged to the extent of the exit load; redemptions after the exit load period have no penalties.
Big wealth with small savings: The principle of SIP investments is that it allows small investors, who do not have lump sum, a chance at wealth creation. The time is very important in SIP investments. To make long term wealth, investment horizon plays a crucial role. Wealth is created through power of compounding so the longer you stay invested the compounding effect gets stronger. The table below shows a scenario analysis of the corpus built over various periods of time at different investment return rates, with a monthly SIP plan of Rs. 5000/-
From the above chart you can make out that ‘the power of compounding’ through SIP investment over a long investment period can indeed be magical.
See the historical return of SIPs in diversified equity funds
An option like SIP investment allows investors from various walks of life and income levels to start investing. An investor can be a first time income holder earning salary or a seasoned professional who earns a substantial amount. SIP investment, as an option, allows both these kind of investors to invest and both of them stand an equal chance to making long term wealth. Disciple, time and a bit of patience is more important for investments than the big amounts. This understanding of SIP investment can allow anyone to make wealth.
To know how much wealth you can create through monthly SIP investments, please check the SIP calculator
