The Indian mutual funds (MF) industry saw a marginal dip in systematic investment plan (SIP) inflows in the month of July, but that hasn’t deterred distributors and financial advisors from enrolling new investors.
In fact, some distributors have gone a step ahead and launched a small campaign, called Har Ghar SIP. This translates to an SIP in every home, taking off from the Government of India’s recently-launched campaign ‘Har Ghar Tiranga’, which literally translates to ‘a national flag in every home’. Mumbai-based mutual funds distributor, Rajendrra Dhullaa, head of Pratham Services Fincorp LLP, is one among them. Dhullaa tells us that he and a group of MF distributors were casually chatting and they hit upon this idea. A simple exercise in number crunching followed to make the sales pitch strong.
The benefits of SIPs are known to many. But the challenge is: How to convince investors to stay invested for a long time? According to the Association of Mutual Funds in India (AMFI, the mutual fund industry’s trade body), nearly 33 percent of equity assets get withdrawn before a year. Just 23 percent of equity assets stay on between one to two years and another 44 percent stay on for more than two years.
Dhullaa and his group of distributors, who often stay in touch with each other on WhatsApp groups focused on sharing mutual fund investment-related news, came up with a simple math.
If you start an SIP now with just Rs 7,500 a month, that is, India’s 75th year of independence, and stay invested till India’s 100th year of independence, you can become a crorepati by the year 2047.
Such emotional pitches work with investors. “I got several queries from existing clients. It is a feel good factor for them," says Dhullaa. SIPs work best if you stay invested for the long term. “This campaign is just a reason to make people stay invested for the long term,” explains Dhullaa.
How to become a crorepati in 25 years?
If you invest Rs 7,500 every month starting August 2022, then you would have invested a sum of Rs 22.5 lakh over the period of 25 years.
Here’s where the power of compounding kicks in. If you assume that equity markets will grow at 12 percent (at a compounded rate) over the next 25 years, then by the time of India’s 100th year of independence, you’d have a corpus of Rs 1.27 crore in your hands.
If you earn a higher return of 15 percent per annum on your investments, then it gets even better. You are, then, likely to have accumulated a corpus of Rs 2.07 crore by the 100th Independence Day.
Can you afford Rs 7,500 every month?
Yes, says Viral Bhatt, Founder, Money Mantra, Personal Finance Solution Firm, a Mumbai-based mutual funds distribution firm.
Bhatt observes that over the years, income levels have gone up, even if expenses too have gone up. As an advisor, he says, that he typically recommends the ‘30-30-30 approach’. This, he says, means that of your take-home salary, keep 30 percent upper limit as your expenses, do not pay equated monthly instalments (EMIs) in excess of 30 percent of your take-home pay, and invest at least 30 percent of your take-home pay. “The rest 10 percent can be kept in cash,” he adds.
Can we reasonably expect equities to give a return of 12 percent (compounded) over a 25-year time period? “The Rs 1-crore target can be done even with 10 percent returns (compounded annualised) through the SIP. This is possible with even a portfolio of 60 percent equities and 40 percent debt. This is so doable,” says Srikanth Bhagavat, Managing Director, Hexagon Capital Advisors, which operates Hexagon Wealth.
Bhagavat says that getting into a long-term SIP is the “best strategy to fund long-term critical or non-critical goals. This has the benefits of disciplined and regular savings to put you on the path to your goals. Volatility is also controlled because of the forced averaging that happens by virtue of monthly investing through the SIP.”
He tells us that SIP has worked for his own long-term goals. “I have used the concept of SIP to my advantage while saving for my children's graduate and post-graduate education. Starting with very small SIPs (like Rs 1,500 per month) in equity funds, I went on growing it based on my ability. But at the end of the day, I had sufficient savings to fund the goals and a return (compounded annualised growth rate) of 18.79 percent to boot.”
Volatility is controlled
A 12 percent compounded return over a long period of time, means that equity returns, intermittently, can be far lower. In other years, equity returns can surpass the 12 percent mark.For instance, during the financial year 2021-22, equity assets garnered a return of 20.5 percent, but the returns were -24.8 percent in the year 2019-20.