You may often delay your decision to start saving and investing because you do not have a large investible surplus. You may consider that regularly investing smaller amounts would not be sufficient to meet your long-term financial objectives.
However, you overlook the potential of a Systematic Investment Plan (SIP). A SIP allows you to invest a small amount in a mutual fund of your choice at regular intervals. The investment may be done on a weekly, monthly, or quarterly basis as per your personal financial situation.
Lump sum vs. SIP
As a disciplined investor, you must use a combination of lump sum and SIP investments to maximize returns. A lump sum investment remains invested for a longer period, which allows it to grow because of the power of compounding. It means that when the return on your investment is reinvested, you are able to earn an additional income over and above the principal amount.
On the other hand, a SIP allows you to invest smaller amounts at regular intervals in mutual funds of your choice. Rupee cost averaging is the biggest benefit of SIP. This means that you are able to purchase more units when the price is low and lesser units when the price increases.
Who should invest in SIP and as a lump sum?
If you have an investible surplus, you may choose a lump sum investment. The money may be invested in a liquid fund. The amount may then be transferred to an equity fund through the Systematic Transfer Plan (STP). At the end of the STP period, your entire amount moves to an equity fund. You are then able to accumulate a higher corpus through the power of compounding.
In comparison, if you are new to investing, a SIP in a mutual fund may be more advantageous. If you want to know how to invest in SIP, it is very simple. You may simply provide an Electronic Clearing System (ECS) instruction to your bank. The amount is directly debited from your account to your chosen fund on the specified date.
If you are salaried with a regular monthly income, starting a SIP is advisable. With a confirmed monthly income, you are assured that you will never miss on the SIP date. However, if you are self-employed with no regularity of the cash inflow, lump-sum investing is advisable.
You may be surprised to know the power of investing even INR 5000 per month in a SIP mutual fund. If this is invested in an equity fund, you may be able to accumulate over INR 1crore during a 20-year period.
Understanding how a SIP of INR 5000 per month works
The best way to achieve your long-term financial goals is to start a SIP investment of INR 5000 per month in an equity fund. Compared to all other asset classes, equities have the potential to deliver the highest returns during the long-term. In addition, the higher returns are often able to beat the rate of inflation. As inflation rises, the value of money reduces and your income may eventually be insufficient to meet even your basic expenses. Equity funds also have a tax advantage because Long-Term Capital Gains (LTCG) taxes currently are zero. Therefore, when you stay invested in an equity fund for at least one year, your gains are liable to no taxes. As a result, your effective rate of return in a SIP mutual fund increases.
You may choose from several equity funds offered by various mutual fund houses. A quick and easy way is to compare the performance of these funds on the World Wide Web. Several online portals allow you to compare different equity funds and provide beneficial recommendations. However, it is important that you take into account your risk appetite before you choose to invest in any of these multiple equity mutual fund schemes. Even when you invest only INR 5000 per month in a fund that offers 12% annual returns, the accumulated corpus at the end of 25.5 years would be over INR 1crore.
Increasing SIP amount
Keeping the same SIP investment amount is not the ideal method to accumulate larger corpus during the long-term. It is recommended you increase the installment amount each year as your annual income rises. Therefore, if you start with an amount of INR 5000 per month and increase it annually by 10%, the installment in the third year itself exceeds INR 6000 per month. This allows you to earn higher returns on a larger investible surplus. You will be able to build a corpus exceeding INR 1crore within 21 years of starting the SIP as increasing the annual installment amount by 10% is not difficult and would not result in any financial distress for you.
Now that you know how to invest in SIP or lump sum, remember that investing is not a one-time activity. You must regularly check and monitor the performance of your portfolio. If any modifications are needed to ensure you are on track to achieve your goals, you must do the required.