look news india
Amid rising inflation and uncertain economic scenarios, creating a strong fund for one’s future, children’s higher education or retirement has become the first priority of every salaried person and businessman. The interest earned on traditional savings schemes like bank fixed deposits or recurring deposits often proves unable to beat inflation. In such a situation, Systematic Investment Plan i.e. SIP has emerged as the most powerful wealth creation tool for middle class and small investors. The biggest advantage of SIP is that you do not need a huge lump sum amount; You can invest a fixed portion of your monthly income in equity mutual funds every month in a disciplined manner. When you invest a practical amount like ₹ 8,000 every month in the market for a long period, the magic of Rupee Cost Averaging and Compounding Interest (Power of Compounding) works such that your small monthly contribution turns into a huge financial security blanket of crores of rupees in the years to come.
If an investor starts a SIP of ₹8,000 every month without a break and continues it continuously for 10 years i.e. 120 months, a solid financial foundation is built. The long-term historical track record of the Indian stock market and diversified large and flexi-cap equity mutual funds has shown annual CAGR returns of around 12 per cent. Based on this standard assumed return of 12%, the complete math for 10 years works out as follows: The total principal deposited from your pocket in 10 years will be ₹9,60,000 (approximately ₹9.60 lakh). During this period, the total estimated wealth gain you will get from the formula of 12% annual expected return will be approximately ₹ 8,99,000. Thus, after completion of 10 years, your total maturity fund will be around ₹ 18.59 lakh (approximately ₹ 18.6 lakh). This fund becomes a strong cushion for any emergent need, be it a child’s initial college fees or the purchase of a car, where your total capital is almost doubled.
The true beauty of compounding comes over time; The older the SIP becomes, the faster the rate of returns becomes. If instead of stopping your monthly SIP of ₹8,000 at 10 years, you continue it for the next 5 more years i.e. a total of 15 years (180 months), the results are surprising. Your total invested amount during 15 years will be ₹14,40,000 (₹14.40 lakh). Now the thing to note is that with an average return of 12% during this period, your estimated interest or wealth gain will jump to around ₹ 26,00,000. That means, you will get almost double the profit from the amount you invested from your own pocket only in the form of compounding interest. In this way, at the end of 15 years, your total portfolio value will become a huge fund of approximately ₹ 40.37 lakh (approximately ₹ 40.4 lakh). This is the period when your money starts working for you and compound interest also starts getting added on the interest.
When an investor displays the financial discipline and patience to hold on for a long period of 20 years (240 months), he truly reaches the milestone of ‘wealth creation’. By depositing ₹8,000 every month for 20 years, the total amount invested from your pocket will be only ₹19,20,000 (₹19.20 lakh). But with an estimated annual return of 12%, the wealth gain you will get during this period will be around ₹60,73,000. This simply means that after 20 years your total maturity corpus will be around ₹79.93 lakh (i.e. equal to the entire ₹80 lakh). If the market performance is a little better and the fund gives an average annual return of 14% to 15%, then the same SIP of ₹8,000 can create a huge corpus of ₹1 crore to ₹1.2 crore in 20 years. This fund is sufficient to live a stress-free and respectable life after retirement without being dependent on anyone.
If you adopt the modern method of ‘Step-Up SIP’ instead of normal SIP, then the same returns can be more than double. Salaries of working people increase with increments every year, so financial planners recommend setting an auto-increase (top-up) of at least 10% every year in your SIP as well. For example, in the first year you paid ₹8,000 per month, in the second year you increased it by 10% to ₹8,800 per month, in the third year you paid ₹9,680 per month and so on. With this 10% step-up strategy, your total investment out of pocket in 20 years will be around ₹55 lakh, but at 12% returns, the total maturity fund after 20 years will directly cross ₹1.5 crore to ₹1.8 crore. Step-up SIP not only balances your increasing purchasing power but also gives you a chance to join the millionaire club years ahead of time.
It is very easy to start SIP in mutual funds, but to earn maximum profits, it is important to follow some basic rules. The first thing to do is, instead of putting the entire ₹8,000 in a single fund, split it into two or three different categories to spread the risk; Like ₹4,000 in a good large and mid-cap fund, ₹2,500 in a flexi-cap fund and ₹1,500 in a small-cap fund. The second important thing is that whenever there is a huge fall in the stock market or there is a recession, never panic and stop your SIP. In a market downturn, you get higher NAV units of the mutual fund for the same ₹ 8,000, which makes the returns rocket as the market rises. Finally, always choose ‘Direct Plan’ and ‘Growth Option’ only, because deduction of middlemen’s commission in regular plan can lead to loss of lakhs of rupees in the long run.