Sometimes solutions to most complex problems are pretty simple.
However, we fail to appreciate the power of simplicity. In the world of wealth creation too, simplicity can make wonders.
In today’s interconnected world, where financial markets are influenced by global events and technological innovations shape investment strategies, Systematic Investment Plans (SIP) stands out as a beacon of stability and foresight. These modern investment tools harness the power of automation and disciplined contributions to navigate the flexible landscape of stocks and mutual funds.
By spreading investments over time SIPs mitigate the impact of market fluctuations, allowing investors to benefit from cost averaging. This method has consistently yielded favourable returns, making SIPs a preferred choice for long-term wealth accumulation and financial goal achievement.
This introductory paragraph sets the stage for a deeper exploration of SIP returns, illustrating their relevance in the contemporary realm of financial planning and wealth management.
Understanding the SIP
SIP Returns are the result of investing a fixed amount at the regular interval in mutual fund. The Investors buy more units when the prices are low and fewer units when the prices are high, ultimately lowering the average cost per unit.
Let’s understand with an example,
For Example:
A person invests Rs. 1,000 for 10 months in SIP. We will find out that the actual average purchase cost of asset would be lower than the average NAV of his investment over 10 months, which is the key benefit of Rupee Cost Averaging.
Average purchase cost as per SIP = Total Investment/Total Units Purchased.
i.e. Average Purchase cost as per SIP = 13.86.
Strategies while investing in SIP’s
– Stay Invested: Consistency is key to maximizing SIP returns. Stay invested through market ups and downs to benefit from the power of compounding.
– Increase SIP Amounts Regularly: As income grows, consider increasing SIP amounts to accelerate wealth accumulation.
– Diversify Portfolio: Spread investments across different asset classes and mutual fund categories to diversify risk and optimize returns.
– Monitor Performance: Regularly review fund performance and make adjustments if necessary to ensure alignment with investment goals.
– Avoid Timing the Market: Attempting to time the market can be counterproductive. Stick to the SIP strategy and focus on long-term objectives rather than short-term market fluctuations.
Let’s understand with help of an example, how your investment would have grown with an SIP amount of Rs.25,000 over different time span:
Thus, as clearly visible from the above example, a disciplined investment of Rs.25,000 would have created substantial wealth for an investor.
Systematic Investment Plan has several benefits. Some of them are:
– Discipline: SIPs encourage regular investing, instilling discipline in investors by promoting a consistent investment habit.
– Rupee Cost Averaging: Investing a fixed amount regularly allows investors to buy more units when prices are low and fewer units when prices are high, averaging out the cost over time.
– Compounding: SIPs benefit from the power of compounding, where returns earned on the invested amount generate additional returns over time.
– Flexibility: Investors can start with a small amount and gradually increase their investment as their financial situation improves.
– Reduced Market Timing Risk: Since investments are spread over time, SIPs reduce the risk of investing a large sum at an inopportune time in the market.
We have picked some of the Mutual fund Schemes from the basket of schemes which have performed during the longer period of time.
Let’s see them,
As we can see that all of the mutual funds schemes which are in the 5 Year & 10 Year period of span have performed well during the years. Let’s assume the inflation rate of 6% still most of the schemes have had given returns over the 12% returns.
We can see that there are some schemes which gave less than 10% in its category during the year 2015-2019 with performance for other schemes also affected during the period. This was because of the NBFC crisis. Mutual funds faced severe crunch as they stopped refinancing the loans of NBFC’s immediately after the IL&FS Crisis. This crisis in the NBFC Sector had affected the investor’s confidence in mutual funds & the broader financial system. This could have led to shift in investor preference towards safer investment options.
Evaluating SIP Returns:
– Extended Internal Rate of return (XIRR): XIRR takes into account the timing of each SIP instalment providing more accurate measure than CAGR. It considers the irregularity of cash flows & is useful for assessing the SIP return accurately.
– Bench Mark Comparison: Comparing the SIP returns with the relevant market benchmarks such as Nifty or Sensex can provide valuable insights into fund’s performance relative to the broader market.
Conclusion:
SIP returns offer investors a disciplined and effective way to navigate the complexities of financial markets while steadily building wealth over time. By harnessing the power of compounding and embracing a long-term investment horizon, investors can unlock the full potential of SIP returns and achieve their financial aspirations. Remember, the key lies in consistency, discipline, and a well-defined investment strategy tailored to individual goals and risk tolerance. So, start early, stay committed, and let SIP returns pave the way to financial prosperity.
We at RichVik, also guide the clients throughout their SIP journey for optimization of wealth creation vis a vis market condition.
To understand more on the topic as well as to start investments please feel free to contact us:
Phone: +91-9324609115
E-mail: team@richvikwealth.in
The article is authored by Mr. Saurabh Gosavi from Team RichVik.