Start with an equity SIP - That is your best route!

What should be your entry strategy for equities? The best way to start investing for the long term is through equity fund SIPs. Here are 7 unique benefits from SIPs.

Sep 24, 2020 10:09 IST India Infoline News Service

What should be your entry strategy for equities? Should you start with large caps, mid cap or small cap stocks? Should you instead prefer the safety of equity mutual funds? The best way to start investing for the long term is through equity fund SIPs.

Systematic investment plans (SIP) allocate a fixed sum of money on a particular date to an equity fund and just continue for a long period. Here are 7 unique benefits from SIPs.

You create wealth without too much effort

Systematic investment plan (SIP) entails a one-time exercise of KYC before investing. Once the fund is identified and the SIP forms and mandates are signed and submitted to the AMC, you job is almost over. The only thing to do after that is to monitor your fund’s portfolio annually and take a call on rebalancing. There is not much else to really worry about.

It is more about discipline than about skill or timing

The only thing you need to ensure in a SIP is that you stay disciplined and keep investing each month. You don’t worry too much about volatility as it actually works in your favour. When markets rise, it gives you more value and if markets fall it gives you more units. Either ways, you benefit in the long run.

If you had started SIP of Rs10,000 per month on the tenth of each month in DSP Equity Fund (Growth Plan), in the last 15 years you would have invested Rs18 lakhs. However, this would have grown to Rs46.12 lakhs in the last 15 years yielding 11.63% CAGR. All this happened with limited effort from your side.

SIPs are flexible; either ways

One more advantage in SIPs is that it is extremely flexible. For example, you can do a monthly SIP of Rs500 or Rs5,000 or Rs50,000. You can decide based on your goals and your affordability. In case you believe that your cash flows are under stress, you can temporarily stop the SIP and restart again once the situation has reverted to normal.

Also, the SIP is flexible in the sense that you can reduce or increase the SIP amount based on your convenience. You can also opt for a step-up SIP where the SIP amount automatically goes up each year. SIPs are invested in equity funds that are liquid and can be withdrawn any time; although that is not advisable.

SIP makes you realize your saving potential
This is an interesting and useful aspect of SIP. Consider the table below.
Financial Goal Goal amount Invested in Time to goal Monthly SIP
Retirement Rs2cr Equity Funds (13%) 20 years Rs17,500
Child’s Education Rs1cr Equity Funds (13%) 15 years Rs18,000
Own Business Rs0.50cr Equity Funds (13%) 10 years Rs20,500

The table gives the investor clarity on two fronts. He needs to save Rs56,000 per month to achieve all three long-term goals. Secondly, a diversified equity fund can generate these kinds of returns. This enables you to review your budget and analyze why you are falling short of your target. It has been observed that minor tweaks in the household budget can increase your saving capacity by 15-20% each month, which the SIP tells you.

Market volatility actually benefits you

If you look back at the markets overt twenty years, you had 6 years of bull markets, 4 years of bear markets and 10 years of directionless. Equity fund SIPs may not work wonders in a bull market but it works very well in bearish and lacklustre markets. That means; in a SIP you are likely to gain 70% of the time. That is why SIPs do well over a longer period of time.

Small SIP makes a big difference to your goals

This is an advantage that not a lot of investors really appreciate. It is most important that you start SIP investing, however, small it might be. In SIP investing, time works in your favour and matters more than how much you invest. If that’s hard to believe, check this.
Investor Monthly SIP Invested in Time to goal Investment Final Value
Alpha Rs5,000 Equity Funds (13%) 30 years Rs18 lakhs Rs2.21cr
Beta Rs10,000 Equity Funds (13%) 20 years Rs24 lakhs Rs1.15cr
Gamma Rs30,000 Equity Funds (13%) 10 years Rs36 lakhs Rs0.75cr

What is the reason Alpha has done so much better than Gamma despite investing half the amount. The answer is time. Alpha has just sustained a smaller SIP for much longer.

SIP is an auto compounder

Power of compounding in a SIP comes because your principal and your returns earn more returns. By the fifth year, normally your returns are generating more returns than the principal. That is when compounding starts to play a bigger role. Unlike an equity stock that pays out the dividends, you can opt for the growth plan of equity funds where compounding is automatic. That is the best way to fully leverage your SIP.

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