The popularity of SIPs in mutual funds is gaining traction in India. As per AMFI (Association of Mutual Funds in India), SIP contributions in FY 2020-21 were Rs.96,080 crores. This jumped to Rs.1,24,566 in FY 2021-22. Moreover, compared to a contribution of Rs.43,921 crores in FY 2016-17 the figure has tripled within a span of five years!
SIPs are becoming the hot-favourite of investors and rightly so!
When it comes to investing in mutual funds, SIPs (Systematic Investment Plans) are the most favourable route. They allow you to invest a fixed amount at regular intervals. The minimum investment starts at Rs.500 which makes SIPs affordable for small investors. Furthermore, the regular investment helps you invest in a disciplined manner. For instance, if you have chosen the monthly instalment option, the SIP amount would be deducted from your bank account and credited to the selected mutual fund scheme. This would create a steady portfolio with regular investments every month.
SIPs have the potential to create wealth and grow your portfolio. This is because of two main reasons –
-
Rupee-cost averaging
-
Compounding of returns
In fact, the benefit of rupee-cost averaging is unique to SIP investments. It helps in mitigating the volatility risks of the market so that you don’t have to wait for the right time. With rupee-cost averaging, you do not have to time the market to invest your money. The SIP continues irrespective of the market movements. You buy more when the market is low and less when the market is high. Overall, the effective NAV (Net Asset Value) gets averaged out which is the whole concept of rupee-cost averaging in SIP.
As such your investments continue irrespective of market movements. This helps you in accumulating a corpus over time rather than waiting for the ‘right’ time.
Confused?
Let’s understand with an example.
Say, you invest Rs.1000 every month in a mutual fund scheme for 7 months. When you start, the NAV is Rs.10. Thereafter, here’s how your SIP works –
|
Month |
Investment amount |
NAV as on the date of investment |
Number of units bought |
|
1 |
Rs.1000 |
10 |
100 |
|
2 |
Rs.1000 |
10.2 |
98.04 |
|
3 |
Rs.1000 |
10.1 |
99.01 |
|
4 |
Rs.1000 |
9.6 |
104.17 |
|
5 |
Rs.1000 |
9.8 |
102.04 |
|
6 |
Rs.1000 |
9.5 |
105.26 |
|
7 |
Rs.1000 |
9.7 |
103.09 |
|
Total investment |
Rs.7000 |
Average NAV = 9.84 |
Total units = 711.61 |
By investing Rs.7000 over 7 months, you managed to buy 711.61 units. If, on the other hand, you had invested Rs.7000 in a lump sum when the NAV was Rs.10, you would have managed to buy only 700 units.
Thus, through SIPs, you got the benefit of rupee cost averaging wherein the effective NAV averaged out at 9.84 giving you 711.61 units for your investment. You didn’t have to time the market. Moreover, market swings did not affect your investments as you continued investing even when the market fell to buy more units. So, with rupee-cost averaging, you can invest in all market conditions and even end up getting higher number of units. In the long run, higher units would mean higher returns and higher corpus accumulation.
Besides rupee-cost averaging, compounding also works wonders to maximise your portfolio. For instance, if you set aside Rs.5000 every month in a mutual fund SIP which earns an assumed rate of return of 12%, your corpus would be as follows –
-
After 5 years – Rs.4.08 lakhs
-
After 10 years – Rs.11.5 lakhs
-
After 15 years – Rs.24.98 lakhs
-
After 20 years – Rs. 49.46 lakhs
Compounding helps in maximising your portfolio if you give your SIPs time.
So, combine rupee-cost averaging and compounding and you get a winning formula for building your wealth. As Warren Buffet said, ‘The rich invest in time, the poor invest in money’. So, invest in a systematic mutual fund scheme. Choose the SIP route and have a long-term perspective that gives your investments time to grow. Do not fret about market volatilities as rupee cost averaging in SIPs would smoothen out the market swings and help you grow your portfolio steadily.
So, start saving with Rs.500 or above and invest in a mutual fund SIP. Also, increase the SIP amount progressively as you earn more and save more so that you can build up the corpus needed for your financial goals.