7 Truths of Investments: Truth #1

An SIP of ₹5000/month started 25 years ago could've made you a crorepati by now.
Sounds unbelievable, right?
But it's true. 

You don’t need a big corpus. Even if you had invested ₹5,000 every month in a mutual fund scheme through a systematic investment plan (SIP) over the last 25 years, you could have accumulated over ₹1 crore by now. The key is to invest consistently, stay invested for at least 25 years and to pick a fund that gives you equity-style returns (of about 13%).

How does this work?
Let's find out.

What is an SIP?
An SIP is a mode of investment that allows you to invest a fixed amount of money every month in a mutual fund scheme of your choice. You can start an SIP with an amount as low as ₹500 per month or ₹100 per month in some schemes (Association of Mutual Funds in India). The amount you choose to invest is automatically debited from your bank account and invested in the mutual fund scheme at the prevailing net asset value (NAV).

How does an SIP work?

An SIP works on two principles: rupee cost averaging and compounding.

Rupee cost averaging: Investing via an SIP allows you to buy more units of a mutual fund when the market is down (because the per unit price decreases) and less units when the market is high (because the per unit price increases). This averages out the cost of your investment over time and reduces the impact of market fluctuations.

Compounding: When you invest through an SIP, you earn returns not only on your principal amount but also on the gains earned on the principal amount. This means your money grows over time as the returns also earn returns.

How can an SIP make you a crorepati?

Let's assume you started an SIP of ₹5,000 per month in a mutual fund scheme that gave an average annual return of 13% for the last 25 years (we are assuming 13% return which is as per the NIFTY 50 TRI data from 31st Dec 1999 to 31st Dec 2022 - ~13.1%. TRI Index assumes the dividends are reinvested back in the index).

Here's how much your investment would have grown over time:

As you can see, by investing just ₹15 lakh over 25 years through SIP, you could have accumulated over ₹1 crore by now. That's the power of an SIP!

What are the benefits of SIP?

SIP investments offers many benefits to investors such as:

1. Convenience: You can start an SIP online with a few clicks and automate your investments without any hassle.
2. Discipline: SIP helps you develop a habit of saving and investing regularly and helps you achieve your financial goals.
3. Flexibility: You can choose the amount, frequency and duration of your SIP as per your convenience and budget. You can also stop or modify your SIP anytime.
4. Diversification: You can invest in different types of mutual fund schemes through SIP and diversify your portfolio across asset classes and sectors.
5. Tax efficiency: You can save tax by investing in equity-linked saving schemes (ELSS) through an SIP. Investments up to ₹1.5 lakh per year are eligible for deduction under Section 80C of the Income Tax Act if you are filing returns under the old tax regime. ELSS returns are also tax-free if held for more than one year.

What are the risks of investing in an SIP?

SIP is not a magic formula that guarantees high returns. It has some risks that investors should be aware of such as:

1. Market risk: Investing via SIP does not eliminate the inherent risk of investing in mutual funds. The returns will depend on the performance of the underlying scheme and the market conditions. There is no guarantee that you will get the expected returns or even recover your principal amount.
2.  Inflation risk: Investing via SIP may not be able to beat inflation if the mutual fund returns are lower than the inflation rate. This may erode the purchasing power of your money over time.
3.  Liquidity risk: SIP investments may not provide immediate liquidity if you need money urgently. Some mutual fund schemes may also levy an exit load or have lock-in periods that could restrict your ability to withdraw your money before a certain time.

How to start an SIP on Upstox?

To start an SIP on Upstox, follow these steps:

1. Sign up on the Upstox app.
2. Complete your KYC.
3. Explore and select from a list of top rated mutual funds.
4. Decide the amount, frequency and duration of your SIP.
5. Start your SIP.
6. Set up the auto-debit mandate.
7. Monitor and track your SIP.

Conclusion

An SIP is a simple and smart way to invest in mutual funds and create wealth over time. It helps you take advantage of rupee cost averaging and compounding and achieve your financial goals with discipline and convenience. However, you should also be aware of the risks involved and choose a suitable mutual fund scheme for your SIP.