At the outset, wishing each and every member of my community a wonderful new year with a lifetime of peace and happiness. I have been scratching my head for quite a while to write today’s column. I wanted a subject that encapsulates a lifetime remedy to long term wealth creation. A one-stop-shop that liberates investors from the multitude of investment options which confuses rather than convince; a strategy which generates assured wealth that is tried and tested for many years. Will you read on if I told you the returns have defeated even real estate gains by a decent margin? Will it intrigue you if I said that in my entire career of financial advisory, I am yet to come across a better investment strategy than the one I’m about to articulate? It is none other than ‘SIP’ i.e. Systematic Investment Plan – a method which has never failed investors in the long run and has always created wealth.
SIP is a simple strategy to invest a fixed amount into mutual funds on a monthly basis for a specified duration. This modest method exemplifies power of compounding and cost averaging. The benefits are plenty and de-merits are none!
Rupee Cost Averaging And The Power Of Compounding
SIP (Systematic Investment Plan) allows you to invest during regular intervals without committing a large lump-sum amount. If the market rises you will get fewer units and conversely if the market falls you will get more units and hence averages your cost of purchase. This approach not only ensures that investors don’t time the market but also invites a win-win situation. If the market rises, your past purchase value will appreciate and in case the market tanks then you will average because of cheaper price.
Now, to illustrate the power of compounding, let me illustrate with real examples.
Eg. 1: An investment of Rs. 5,000 per month into HDFC Top 200 fund since its inception (20 years ago) would generate an eye popping corpus of Rs. 1.37 Crores today. 21% average yearly return with a total investment of just Rs. 11,95,000! Many more funds have delivered at par or even better returns. This is higher than any property in Mumbai. Tax free after 1 year and money available in 3 days whenever you need it! Beat that!
Eg. 2: It gets better! Suppose luck is not on your side or your advisor/banker takes you for a royal ride, even an SIP into the most average performing diversified equity fund like JM Equity fund has also delivered 11% per annum for the last 20 years, which is still higher than any Fixed Deposit!
Having said this, please note that SIP is ideal for a duration of 10 to 15 years because unless it doesn’t witness markets up’s and down’s the cost averaging won’t come into effect. Usually a market cycle is witnessed within a duration of 8 to 10 years.
Discipline Of Saving
SIP inculcates a pattern of forced savings and grooms the investor to save religiously for the long term. Just like every drop makes an ocean, every penny will make millions. The irony that majority of the investors have not generated the seven-digit figure from SIP is due to a single reason and that is lack of discipline. The most common mistake they make is that they stop the SIP, either because the market is low and funds underperform or due to over commitment on the SIP amount which eventually pinches their wallet. If you are disciplined and simply continue to invest even during the worst phase of the market that’s when the real money is made once the economy recovers. Yes, there will be periods where returns will be shocking but cling on. The highest returns have been made while investing during the lowest levels of the market. Also, don’t over commit on the SIP amount, rather under-commit and invest for a longer duration instead of over committing and fizzling out in the short term. Invest an amount which will not bother you.
Separate the men from the boys and chose veteran funds with a long term track record. There is no other strategy that is more effective, more transparent and more reassuring than investing systematically into Mutual Funds. Try to google the past track performance record of any insurance linked investment plansor any PMS/ structured product with a 20 years record of even 15% annualised return, you will find nothing. Now, do the same for top performing equity mutual funds for the last 15 to 20 years with returns exceeding 20% annualised and Voilà! It will flash all over the screen! This is what I mean by transparency. Based on your risk appetite, decide your asset allocation between debt and equity and get on with the SIP machine. Above all, it’s the discipline and perseverance to invest for long term that will expose the magic of SIP. Gather the fish and the whale will follow…
‘Ethix’ is open to answering any relevant queries on handling your finances.
Mail him at: mehran@ethix.net.in
or visit his website on www.ethix.net.in
- We Can’t Predict. We Can Prepare! - 31 July2021
- Patience Is The Key - 7 September2019
- Market Crashed? Big Deal! - 27 October2018
