Unlocking Wealth with Mutual Fund SIPs: A beginner’s guide to systematic investment plans

It was October 2004, and I peacefully minding my business in my office when a colleague came by for a chat. He was an investment expert, and for the next fifteen minutes, I got the full lowdown on a new product that he was very enthusiastic about – Systematic Investment Plans (SIPs). It made sense, and I signed up for a Rs 3000 monthly SIP into an equity mutual fund. I essentially committed to investing Rs 3000 every month into this fund without fail, irrespective of what was happening to the markets.

Fast forward twenty years, and let us assume that I had continued that SIP all this while. My corpus would be worth over Rs 20 lakh! Markets have given a ~13% average annual return over this period, and regularly investing a couple of thousand bucks would now be worth millions–the sheer power of compounding. And what if I had started a decade earlier? A Rs 3,000 SIP, if started in 1994, would be worth a whopping Rs 85 lakh today! Imagine–an 8x return without expertise or effort other than diligently investing a relatively small sum, no matter what is happening to the markets.

If you want to create long-term wealth, systematic investment plans in equity mutual funds will be one the best weapons in your armoury. Let us learn more about them.

Equity Mutual Funds

For people who do not have the time or expertise to invest in equities, equity mutual funds are an excellent option. You give your money to experts and delegate the entire stock selection and investment process to them. They select the stock portfolio, pool in all the funds from investors like yourself, and invest on your behalf. They make all the investment decisions while giving you complete flexibility in withdrawing your investment whenever you want. It is a very transparent process; you will always know how your portfolio is doing, and you pay a nominal fee to the Asset Management Company (AMC) for their effort.

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Systematic Investment Plans (SIPs)

A common approach is to invest lump sum amounts whenever one has the cash flows. The concern is that one can never time the market perfectly–you may invest when the markets are really expensive. Or, if you choose to wait, you may end up sitting on cash and miss out if the markets continue to go higher. SIPs address this problem.

A SIP strategy entails investing a fixed monthly amount in the same mutual fund without fail. Whether the markets are up, down or flat–it doesn’t matter; you remove all emotion and external information from the decision and stick to your commitment. So staying with my Rs 3000 per month SIP example, if markets are high, I can purchase fewer units for my investment. And if markets are low, I can buy more units. And this will continue month after month for years. So over time, my cost will average out and independent of how volatile the markets may have been, I would have managed to build a portfolio at a good average rate.

The SIP strategy is suitable for anyone who wants to create long-term wealth, has some stable income source, but not the time or capability to invest directly in stocks. Hundreds of equity mutual fund options are available from various fund houses, and one will still need to research or consult professional advisors on which to select. But equity index funds, which mirror the Nifty or the Sensex, are excellent options for those looking for a simple and cost-effective alternative. One can start a SIP with as little as a few hundred rupees a month, and it is a very flexible product, so you can stop your SIPs any time and redeem part or all of your corpus if you so choose. You will need to specify the investment amount, the duration you want to invest, and the frequency. You can start a SIP in the mutual fund of your choice either directly with the Asset Management Company (AMC) or through your bank or financial advisor.

Equities are one of the best options to create long-term wealth, but they pose two inherent challenges: where and when to invest? Mutual funds address the first problem by delegating the stock selection process to experts. And SIPs take care of the second by removing market timing from the equation entirely. They allow you to stay disciplined, invest regularly and not get swayed by market movements. And then you just need to stick to your plan and let the power of compounding work its magic.

(By Rishi Piparaiya, Best-Selling Author and Financial Mentor)

Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.