You would have heard this countless times and from several people: SIP (systematic investment plan) investing works in the long term.
But even though it is a well-established fact (and the best option), there is something else that needs to be given a little more importance than it gets now.
Just because a long-term SIP in equity fund works, it does not mean that you will achieve your long-term financial goals.
Sounds surprising? But hear this out.
Long Term SIP works for your financial goals only if you invest the right SIP amount for the goal.
Random amounts won’t suffice
Let’s take a small example to understand this. Suppose you wish to save up Rs 1 crore in 15 years.
Now many would think that just by investing ‘some’ amount in a mutual fund SIP for 15 years and with hopes of earnings very high returns, you would be able to achieve your goal of Rs 1 crore in 15 years.
Unfortunately, it doesn’t happen that way. As they say, hope is not a great strategy to have in personal finance.
Let’s say that you begin investing a nice round figure of Rs 10,000 SIP per month and keep doing it for the next 15 years.
What would be the final amount after those 15 years?
Assuming 10-12 per cent annual average returns, the investor would accumulate Rs 41-50 lakh.
So, no doubt the SIP worked in the long term and you accumulated close to Rs 50 lakh by just investing Rs 10,000 per month for 15 years. But the point is did you achieve your actual goal of Rs 1 crore in 15 years? No.
And that’s because you did not invest the right SIP amount over these years.
Investing the right sum
A little bit of math will show that to accumulate Rs 1 crore in 15 years at 10-12 per cent returns, you need to do invest Rs 20,000-24,000 per month and not Rs 10,000.
Thus, long-term SIP will work (and it is small investors’ best bet); but whether it helps you reach your financial goals or not depends on not just the returns generated but also on the SIP amount you choose to invest.
You have to choose the right SIP amount to actually benefit from the long-term SIPs when it comes to achieving your financial goals.
In fact, it is so common to see people starting Rs 2000 SIP when they begin earning (like Rs 30,000 per month) and still continuing the same SIP amount of Rs 2000 when their income has increased to Rs 1 lakh a month! They do not increase their monthly investment. However, just a small increase of 5-10 per cent every year can result in the accumulation of a much larger final corpus.
Let’s take the above example of starting with Rs 10,000 SIP per month and see how the final amount changes if the investor increases the amount by just 10 per cent every year.
And the answer is Rs 74-87 lakh.
It is good that you understand that SIP works beautifully in the long term. But for your SIP investments to actually help you achieve your financial goals, you need to invest the right SIP amount and not just any sum.
Of course you would want to have a high rate of return on your investments. But understand what is in your control and what isn’t. How much you invest is in your control. How much you earn on those investments is under the market’s control.
As a long-term investor, and after identifying the goals you wish to invest for, first find out how much you need to invest through SIPs to meet those financial goals within your chosen timelines. You can use an excel calculator or talk to your financial advisor who can help you with it.(The writer is the founder of StableInvestor.com)