A lot of people invest in SIPs for their future, nowadays. Most people don’t have a fair knowledge about how to invest in SIP mutual funds according to their income. So we are trying to clarify the picture to some extent with this small case study.
Let’s assume that I stay in a job for next some decades. I turned 25 a few days back. So for practical purposes, I would work for another 30 years before I retire.
Let’s assume three different scenarios:
I have started a SIP of INR 10000 per month for the next 30 years. In this case, I am assuming that a well-diversified mutual fund scheme will deliver 12% per year. We have schemes in India that have done almost double of that for a decade. But, we should not be over-optimistic, and stick to 12 % for this and also for other scenarios. So, after investing 10K monthly for 30 years, the corpus will finally reach an amount of INR 3.24 Crores. You can find details of calculations in the image below.
I have started SIP of INR 10000 per month for the next 30 years, and I increased my SIP contribution by 10% every year. This is followed by INR 11000 every month in 1st year and INR 12100 in the third year and so on. Now again, the return assumptions are at 12%.
Now after 30 years of increasing SIPs ( started with 10k a month, with a 10% annual increase), the corpus would finally reach the sum of INR 8.40 Crores, which is much higher. Details of the calculations mentioned in the image below.
You can see the difference. A 10% increase in your monthly SIP, results in more than doubles your final corpus. However, You might be wondering that instead of just increasing SIP per year, what would happen if you started initially with higher amounts and kept it constant? The answer is provided in the next scenario.
If we are willing to achieve the corpus which is almost equal to one achieved in the second scenario, i.e. INR 8.40 Crores then you need to start with and continue paying Rs. 26000 every month. Once again the detailed calculations are provided in the image below:
Now, you see in the second and third scenarios, you can achieve the same target amount of INR 8.40 Crore by selecting the two different approaches. Now, the question is,
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Which one is best to choose?
At first glance, it might appear that increasing SIP is a better choice than constant SIP as it is more convenient. It also appears to be in line with a simple common-sense based assumption that:
Increase in income- Expense Rise too- so we should invest
Why should you keep SIP constants when your income is increasing? Your investment must also increase. Let’s assume, you started a 10K SIP when you were earning 50k per month some years back, and you are flaunting this 10K SIP even today. Now, currently, you earn more than Rs. 1.5 Lac a month, so it is something stupid. You will not become rich. An important point to understand here is that even though both situations result in INR 8.4 Crores at the end of 30 years, the total investments made by you in both cases would differ significantly.
In scenario 3, the SIP is constant at Rs.26000 for the entire 30 years. While, in increasing the SIP model, you start initially with INR 10000 and it continues to rise every year. In the 12th year, the SIP amount in raising the SIP scenario crosses Rs. 26000.
Ist year 18, monthly SIP would be more than Rs. 50000. In year 26, it will be more than INR 1 Lac a month. If you compare these numbers with a constant SIP of 26000, these might appear like huge numbers. However, decades from now, these would be very small numbers considering the rise in yearly income and inflation, etc. But as I mentioned, total investment in both cases will doffer significantly. In a constant SIP scenario, you would be making a total investment worth Rs. 93.6 lacs in the entire 30 years. But in increasing the SIP situation, your total investment will be INR 1.97 Crores, which is almost twice.
So is it better to start with a bigger amount in constant SIP rather than increasing one? As we saw in both cases, the end result is the same- Rs. 8.4 Cr.
Benefits of SIP
1. You can quit anytime
There is no fine if you determined to stop a SIP plan. If you want to quit, you simply have to opt-out of the SIP plan. This has a very huge benefit over recurring deposits (RD) which usually put a fine on you if you want to discontinue it. After discontinuing your regular SIP investment, you may choose to get back the amount or let it continue to be invested in the mutual fund.
2. You can always skip SIP payment
If, due to some reason you don’t have sufficient balance in your account for the SIP investment of a particular month, you can still continue with the SIP next month without any problems. No penalty or charge will be levied against you. In the case of RD, there is mostly a fine for missing a payment.
3. If you have more money you can opt for a new SIP
If your earning are increased or if you are able to save more, you can anytime start a new SIP plan in the same mutual fund or a separate mutual fund. In this way, the extra money will also be invested in your future.
4. You become more disciplined in your savings when you invest in SIP
It is a very common complaint from a lot of people that they aren’t able to save money. The reality is that your spending increases with your income. Thus, you should save first and then spend. Whenever you decide your date of SIP installment just after the date you receive your salary, you invest more rather than spending
5. You don't need a huge amount to invest in SIP
With SIP plans, you are able to start investing in mutual funds with an amount as little as INR 500 a month. Here, the best mutual funds to start a SIP investment with INR.500. Even if your savings are small, you can still take benefit of the high growth being experienced by India by investing in mutual funds.
6. You Don’t have the burden of Timing the Market
You might have heard that you should not go for investment in an inflated market. As you invest using a SIP plan, you should not worry about timing your investment at all. When the market is high, your monthly SIP buys you less few units of a mutual fund. When the market is on the low side, the same monthly SIP amount buys you more units. Hence, in the longer duration, you do not pay very hefty prices for any unit of a mutual fund. This phenomenon is the rupee cost averaging.
7. You get an advantage from the effect of Compounding
As you invest using a SIP plan, your monthly SIP investment results in returns. Noe, these returns are added to your actual investment amount and invested again. So over a period, your regular monthly SIP and the returns earned by them are subjected to a compounding effect that secures exponential growth.
8. You keep Emotions at bay while investing
While investing, you must keep emotions away. In the short term, the markets fluctuate significantly. During such ups and downs, you might feel like making impulsive purchases or maybe sales. This is generally not a good strategy. You should invest for a long period of duration. With investment in SIP plans, you follow a disciplined technique to investing. Due to the continuous habit of investing in a SIP plan, you avert yourself from responding to short-term volatility.
9. Past performance factor
People who had invested in mutual funds approximately 15 years ago are now gaining big rewards. Let’s see some examples.
Assume that you had started a SIP of INR 3000 every month in HDFC Top 200 in 1999. In a 15 year duration, you would have spent a total of approximately INR.5.4 lakh. At the same time, your investment will be worth around ₹35 lakh.
Now consider the same SIP amount in Franklin India Prima Plus. This time, you would have spent again a total of INR.5.4 lakh. Your investment’s worth in 15 years will be around ₹31 lakh.
Systematic investment plans or SIPs protect you from any damages. A few of them are short-term risks, also short-term volatility, emotional and impulsive reactions, maybe overspending, and so on. SIP plans are one of the safest and very convenient ways to invest in the equity markets of India through mutual funds.
As we start investing, it's very difficult to allocate a very big amount toward mutual fund SIPs. Let’s assume you start earning INR 40000 As your first salary. You under normal circumstances, would not be able to pay out Rs. 26000 per month. However, you can easily manage Rs. 10000. And with increasing income, you can keep rising your SIP amount.
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