Here's how SIPs help investors

Systematic investing for long-term wealth creation

B Gopkumar, MD & CEO, Axis Securities. Credit: DH Illustration

Wealth creation is a common goal among investors from all walks of life. However, for most people, investing a large sum of money in one go may be impractical.

The easier and often more beneficial alternative to lump-sum investing is a Systematic Investment Plan (SIP).

Data from the Association of Mutual Funds in India (AMFI) shows that SIPs are garnering excellent traction from retail investors.

In July 2021, the assets under management of SIP accounts hit a new record of
Rs 5 lakh crore, with the average portfolio value of SIP investors coming in at Rs 1.2 lakh during the month. Over the next two months, SIP AUMs have breached the 5-lakh crore mark to hit new highs of Rs 5.26 lakh crores.

But how do SIPs help investors? At first glance, they are undoubtedly more convenient for investors than lump sum investments. However, a closer look at the benefits of SIPs reveals that systematic investing helps with long-term wealth creation.

Here’s how.

Habit of disciplined investing

The secret to building wealth over the long term is consistency and discipline. SIPs help investors cultivate both these habits effortlessly. Additionally, when you start investing via a Systematic Investment Plan, you have good reason to save before you spend. This kind of approach makes it easier for you to attain your long-term financial goals.

And if you initially find it challenging to make this change and invest consistently, you can always use the auto-debit options available today. That way, you are not tempted to spend your investment budget frivolously.

Advantage of rupee cost averaging

SIPs also give you the benefit of rupee cost averaging. Since you invest a fixed amount periodically, you can buy fewer units when the market is on an uptrend and a higher number of investment units when there is a market correction. Over the long term, this helps bring down the average cost of investing in the markets.

With a lump sum investment, however, you do not enjoy this advantage. If you invest during a market high, the initial cost continues to be the same over the long term, unlike with an SIP, where your investment cost averages out over time.

Power of compounding

Compounding entails earning interest on your interest. In other words, your earnings are reinvested, thereby giving you returns on your returns. And systematic investing gives you this advantage, particularly if you start an SIP earlier in life.

That way, your investments have a longer
tenure to benefit from the magic of compounding.

For example, if you choose to start an SIP and invest Rs. 1,000 monthly at the rate of 9% per annum, your corpus will grow to Rs 1.94 lakhs in 10 years, Rs 6.72 lakhs in 20 years, and Rs 18.44 lakhs in 30 years.

Thus compounding helps your corpus to grow exponentially, rather than linearly, over time.

The correct market investments can even give you inflation-beating returns over the long term because of compounding. And that, in turn, helps you with the goal of wealth creation.

‘Time in the market’ over ‘timing’

If you plan to invest a lump sum amount in the markets, you need to time your entry prudently. Your timing determines whether you can take home net gains from your transactions when you exit your position. However, finding the right time to enter or exit the markets can be tricky. Investing systematically in equity instruments takes away this need to time the markets.

Irrespective of whether the market is on an uptrend or a downward trajectory, you can continue to invest via SIPs without being affected by the market’s volatility. And by eliminating the need to time the markets, SIPs make it easier for you to focus on your financial goals and create long-term wealth.

Summing up

Some people wait to save a large sum of capital to start their investment journey,  but with SIPs, you don’t need much to start. With as little as Rs 500 per month, you can begin your SIP journey. With time, as you get better at saving, you can even increase the amount you invest each month. This approach can help you create wealth sooner.

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