​SIP Investment - Brighten Up Diwali with Financial Planning

Diwali is one of the biggest festivals celebrated in India and one of the most auspicious events during the celebrations is Laxmi Pooja, where Hindus venerate and pray to the goddess for prosperity and financial wellbeing. While praying and veneration is integral to the culture, it is also true that God helps those who help themselves. Hence, our financial wellbeing does depend on our actions and decisions as well. One way to create wealth over the long term is through a systematic investment plan (SIP) in mutual funds based on one’s risk-return profile.

What is SIP?

SIP is similar to a recurring bank deposit wherein investors contribute a fixed sum of money at regular intervals. It has emerged as a powerful tool among investors to meet their goals across life stages and also avert equity market volatility by investing via SIP in equity mutual funds​. SIP inflows stood at Rs 8263 crore in September 2019 from Rs 3122 crore in April 2016 .

Rising SIP inflows

Source: AMFI

Benefits of SIP

Minimise the risk of market timing

In most cases, the amount of time spent in the market and not timing the market lead to gains. Investors often attempt to time the market, i.e. when the market falls they sell, when the market rises they buy. SIP ensures regular investments at both the high and low points of the market, and captures the opportunity which is otherwise difficult to forecast.

Rupee cost averaging

SIPs help in averaging out the cost – the concept is commonly referred to as rupee cost averaging. For example, with Rs 1,000 one can buy 50 units of a mutual fund at NAV of Rs 20 per unit or 100 units of the same fund at NAV of Rs 10 per unit depending on whether the market is up or down. Thus, more units are purchased when a scheme’s net asset value (NAV or unit cost) is low and fewer units when the NAV is high. Hence, when the two cases are taken together, the cost is averaged out. The longer the time frame, the greater the benefits of averaging.

Encourages disciplined investing

To see money grow, investors need to be focused on their target – what they want to harvest at the end of the investment period. Through SIP investors save and invest at a pre-defined frequency which brings them closer to the attainment of desired goals.

Affordable and convenient

An oft-heard excuse for not investing is lack of disposal funds. SIPs take care of this problem as the minimum investment amount is low. SIPs are generally available for a small amount, viz. Rs 500 or Rs 1,000 per month depending on the terms and condition of the various mutual fund schemes. While this amount looks small, it can help build a sizeable corpus for meeting several lifetime goals. Further, SIP is a convenient and hassle-free way of investing in mutual funds. Investors need to give one-time instruction about the scheme including the amount, scheme name and bank details to the fund house and, accordingly, the amount is automatically debited at a predefined frequency.

Benefits of compounding over the long term

Early and regular investing via SIP provides the benefits of compounding. Longer the investment period, higher the compounding effect of money. Compounding builds wealth. For instance, a SIP of Rs 5,000 per month over 30 years at a CAGR of 15%* (15-year daily average rolling return of S&P BSE Sensex from inception till September 30, 2019) can generate a corpus of nearly Rs 2.82 crore, which can be one’s retirement kitty.

*Past performance may or may not be sustained in future.

Summing up

Thus, SIPs are a good medium for investors to invest in the capital markets and benefit from it over the long term. Investors should, however, note that investments should not be stopped during market volatility. Consistent investments build more wealth. Further, investors can leverage their income growth over the years to add to the wealth creation capability of the investments. So this Diwali, use the shubh mahurat to start investing through SIPs to generate wealth over the long term and aim to achieve your financial goals.

Investors shall always refer to the Scheme Information Document and Key Information Memorandum of the schemes carefully to understand the investment objective and associated risk factors of the scheme before investing.

Disclaimer: Any comparison mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.