If you are a working professional and dare to bear the risks of market-based changes, then you should invest your money in SIP rather than gold or fixed deposits. According to professionals and financial experts, SIP investment generates more corpus than traditional investments. Mutual funds are probably the best option in the investment market for generating the highest corpus out of your investment. If you plan to invest for a long time and reap the benefits, then a mutual fund is the right place for you.
SIP stands for Systematic Investment Plan, meaning you must invest a fixed amount regularly. It is an excellent scheme offered by mutual funds, which can benefit investors once they understand the basics of the SIP. Instead of investing a vast amount once, the investor can invest a fixed amount at regular intervals over a more extended period. SIP has been gaining popularity in the market as it allows more disciplined investing without much-involving market risks as the market price keeps fluctuating. The SIP scheme is beneficial when one aims to have a long-term investment. In the long term, one can gain the most benefits if one starts investing early in their career. The earlier you start investing, the more benefits you can reap from your investment.
Working process of the SIP
When you apply for one or more SIP plans, the fixed amount is debited from your linked bank account at the end of the month. The debited amount is invested in the mutual funds you signed for that period. In India, you get additional units for the amount added to your investment. This ensures that the invested amount is larger after each reinvestment, and thus, the return you get for the investment is larger. The investor has the option to either receive the returns at the end of the tenure or regular intervals. We can understand the process better by taking an example.
Let us imagine a scenario. Rahul is a working person willing to invest in SIP with low to moderate market risks. He needs ten crores at the end of the investment plan. So, he seeks the advice of financial experts about the investment plans of SIP and how to create the corpus.
According to the founder of Fintoo, CA, Manish P. Hinger, if you are a young investor and can bear the risk of moderate market risks, then you should look to invest in a couple of mutual funds to achieve the goal of ten crores at the end of the plan. If you plan to receive a corpus of ten crores after ten years, assuming the average inflation rate of seven percent for ten years, you would have to invest around twenty crores in SIP. Rahul would have to fill an equity of nearly nine crores of monthly SIP to achieve his goal. Rahul can start two SIPs in the equity significant cap funds of three lacs each. This investment would help Rahul to accumulate an amount close to 12.4 crores after assuming a CAGR of 10% to be conservative in the approach. The expert added that a SIP of 1.4 lacs with the assumption of 12% CAGR in an equity mid-cap fund would result in the accumulation of 3.2 crores after the completion of 10 years. Again, if Rahul invests in a SIP of 1.6 lakhs in equity small caps fund, you would have accumulated 4.4 crores at the end of ten years with the assumption of 15% CAGR yearly. The assumption has been made keeping in mind that Rahul would have some exposure in the debt investment for his short to medium-term goals. If you are looking for good options, the best performing options in the large-cap funds are ICICI Prudential bluechip fund, Quanta focussed fund, HDFC index fund, S&P BSE Sensex plan, and Canara Robeco bluechip equity fund. In the mid-cap fund category, you can choose Axis mid-cap fund and the Kotak emerging equity fund. Edelweiss small cap fund and the Canara Robeco small cap fund are suggested in the small-cap fund category for ten years.
According to Nitin Rao, the head of products and proposition of Epsilon money mart, SIP is a perfect option for people who are looking for a long-term investment. As the tenure of the investment increases, the equity volatility also tends to go down. Starting investment early in life is a sure-shot way of accumulating more money, but you can also choose the step-up SIP for accumulating more money. For an average investor, who looks for an annual return of 12% at an annual inflation rate of 5%, there is the monthly requirement 0f approximately 2 lakh rupees for accumulating a ten crore corpus at the end of twenty years. The investment amount can seem enormous to small investors, but investing small amounts would also help you in the long term. In the case of Rahul, Mr.Rao has calculated the SIP to be around 5,85,000 rupees monthly, keeping the annual return rate at 12% and the annual inflation rate at 5%. He has also mentioned that the SIP can be reduced by increasing the duration by some years, as this is the process. If Rahul decides to increase the tenure by five years more, he would have to pay a SIP of 3,22,000 for the accumulation of ten crore rupees. He has also assured the investors that the investment price at the start may look huge, but at the time of need, after considering all the inflation rates of the market, you would have no shortage in the amount you require.
The founder of the Surmount business advisors Pvt Ltd, Niraj Bora said that he has a few assumptions for the scenario, and he has some parameters for the scenario. The parameters are:
- As the record of the returns for the previous investments suggests, the investor may expect a return of 15% return for his investment in the mutual funds or the entire investment plan as well. The return is considered after studying the returns of the cases before the one we are talking about.
- The time for the investment is taken 20 years. For this time, the monthly investment, the SIP model, is considered.
- For a person having a monthly salary of 1.5 lakhs, the primary monthly investment is deemed to be 35,000 rupees. This investment price would increase 10 percent each year which would increase the amount of investment and, thus, the corpus amount indirectly.
After considering the parameters mentioned above, Mr.Bora has estimated that a corpus of 10 crores can be accumulated after 20 years of the first investment. The fluctuations in the market price may affect the investment sometimes to some extent. Still, the loss in the amount can be covered in the boom period, which may also witness the increase in the corpus as the time of the maturation of the investment is as long as twenty years. The accumulation of a considerable corpus of 10 crores can ne be achieved in two ways. Rahul can either accumulate ten crore rupees by investing a significant amount of money monthly, or he can accumulate the required amount in small amounts over a more extended period. The more time Rahul takes, the less money he has to invest as SIP.
The investment can be balanced by investing in various ways. The growth (blue chips and others), hybrid (debt and equity mix), and the debt funds. In most of the conditions, the ratio of the debt amount is not more than 20% of the overall size of the portfolio. A rule known as the thumb rule is accepted in the market, which suggests that if your age is 25, then you need to have 75 percent of your investment in the equity portfolio, and the other percent of the investment can be invested in debt or mixed securities. Mr.Bora has also suggested the same.
Mr.Bora has also suggested investing in the equity mix as well which comprises the non-blue chip portion also. Generally, the equity mix has more risks than the blue chips, but they also provide higher returns for the investment than blue chips in the long term. Investors are always recommended to read all the details about every type of equity before investing their money, as it is their choice that matters. Small companies have mixed portfolios where they allocate their funds wisely for better returns on their investment. According to Niraj Bora, you should go for investing around 70 percent in the blue-chip portfolio, and the rest 25 or 30 percent of the amount should be invested in the non-blue-chip portfolio to gain the most corpus. Using this technique, the investor can have returns above 15 percent of their investment if the market performs well throughout the investment on average. If you worry about the amount of tax applicable on the returns, then you need not worry about it much as the tax is applied at the end during the withdrawal of the return. The tax percent is thus applied to the whole amount, and its impact on the amount is relatively low and is nullified by the vast amount of returns you accumulate at the end of the tenure.