Wednesday, August 31, 2016

Everything You Need to Know About Wealth Creation Through Systematic Investment Plan (SIP)

Successful investing does not require an extraordinary IQ; it simply requires immense measures of discipline. The ‘Systematic Investment Plan’ or ‘SIP’ is the regimen through which the value investor builds the character, which is one of the vital ingredients for triumph in investing.

SIP is a regimen, not a financial instrument like a share or bond.  Mutual funds have created so much of hype and publicity around the term ‘SIP” that it has acquired a unique status and existence, that many people think that it is an investible financial instrument. SIP is a contract or commitment with a mutual fund to subscribe or invest a certain sum of money in a particular scheme or fund. For example I can decide to invest Rs.1000 every month in HDFC’s equity fund styled, ‘HDFC Top 200 Fund’.  There are many types of funds or schemes like equity or growth funds, debt or income funds and so on but our present topic does not permit us to delve into it and so lets leave for a separate article.

A systematic investment plan need not necessarily be about investing with a mutual fund. If you are able to invest a certain sum every month in shares or bonds or exchange-traded funds regularly with discipline, this is also a SIP.

Frequency of investment
SIP requires a periodic investments but technically the period could be any reasonable time interval such as a month, quarter or six months. However in practice, usually it is very month, which is quite reasonable and convenient.

Minimum investment amount
The minimum investment amount needs to be decided by the investor based on ones financial goals. To create a significant wealth over a period of about 40 years or 480 months (Ideally one should start investing at 20 years of age and enjoy the fruits at 60) the amount should be appropriate. In m they opinion about Rs.10000 to 20000 should be invested every month.

Following graphic depicts the net wealth created for various investment amounts, after taking into account inflation at 10% per annum, which is very high and an expected return of 15% per annum, which is quite reasonable:

As for the minimum investment amount from the perspective of making SIP affordable, funds have brought it down drastically in India. I hear that it can be as low as Rs.50 a month (UTI Retirement Benefit Pension Fund}. I am told that ICICI Prudential also offers a SIP of Rs.50.

Duration of SIP Investment
Finally, the last and crucial golden rule of SIP, which none emphasizes is that a SIP shall be kept alive uninterrupted for very, very long time periods like 40 years. Only then the ‘Miracle of Compounding’ will have an opportunity for work for you and make you a rich and wealthy individual irrespective of which financial class you presently fall in.

Such lengthy period of investment also bring the benefits of ‘Dollar Cost Averaging’.

To conclude, every individual, including the one from the most humble background and means, can become a ‘Crorepati’ or a ‘Millionaire’ through disciplined and long-term ‘Systematic Investment Plans (SIPs). 

1 comment: