Is it possible to really earn big by investing small amounts in a Mutual Fund SIP? If you invest in an equity Mutual Fund SIP, then yes! Despite their merits, debt funds and liquid funds can only take you so far. Time has a mysteriously positive impact on wealth creation, provided you invest in the right equity funds and stay invested long enough. The power of compounding will ensure that you can create big wealth even with a small outlay invested regularly and consistently.
How to ensure that Mutual Funds SIPs can actually help you earn big money?
There are some basic prerequisites if you want SIPs to help you earn big money. Let us look at five such parameters:
- It is essential to start early, even if you start small. The earlier you start, the more your principal earns returns and those returns earn further returns.
- You have got to be disciplined. No choice! One way is to make the SIP contribution, a monthly target, and then build your expense budget around it.
- You have got to invest the money in equities. That is the only route to wealth in the long term. Ideally, SIP will work beautifully if invested in equities over a 15 – 20 year period.
- Don’t get into the timing game. Don’t reduce the SIP if the markets go up or increase it if the markets go down. It is difficult and also redundant to your goal.
- A small aspect to remember: opt for the growth option of an equity fund. Growth options are self-multiplying and also more tax efficient.
How does an SIP’s term make a difference?
It is said that the proof of the pudding lies in the eating. Here’s an example: Assume that four colleagues—with roughly the same level of income and the same career path—start an SIP for their retirement plan. The only difference is that each friend starts the SIP, 5 years later, but with a higher amount. It is interesting to see how the wealth creation clearly favours the person who starts early.
|SIP||Colleague 1||Colleague 2||Colleague 3||Colleague 4|
|Started at the age of||25 years||30 years||35 years||40 years|
|Stopped at the age of||55 years||55 years||55 years||55 years|
|CAGR on Equity MF||14%||14%||14%||14%|
|SIP Amount||Rs. 5,000||Rs. 10,000||Rs. 15,000||Rs. 20,000|
|Total Invested||Rs. 18 lakh||Rs. 30 lakh||Rs. 36 lakh||Rs. 36 lakh|
|Gross Wealth at 55||Rs. 2.78 crore||Rs. 2.72 crore||Rs. 1.97 crore||Rs. 1.23 crore|
|LT capital gains||Rs. 2.60 crore||Rs. 2.42 crore||Rs. 1.61 crore||Rs. 97 lakh|
|Taxable LTCG||Rs.2. 59 crore||Rs. 2.41 crore||Rs. 1.60 crore||Rs. 96 lakh|
|LTCG tax at 10%||Rs. 25.90 lakh||Rs. 24.10 lakh||Rs. 16.00 lakh||Rs. 9.60 lakh|
|Net Wealth at 55 years||Rs. 2.52 crore||Rs. 2.48 core||Rs. 1.81 crore||Rs. 1.13 crore|
|Gross Wealth Ratio||15.44 times||9.07 times||5.47 times||3.42 times|
|Net Wealth Ratio||14.00 times||8.27 times||5.03 times||3.14 times|
The results are actually quite startling. Time plays a huge role here because Colleague 1 who invests just Rs. 5000/- per month does the best among them. His investment ends up with a huge post-tax wealth of Rs. 2.52 crore. That clearly beats any of his other colleagues, despite them contributing higher amounts. That is the power of compounding over time.
The story of Colleague 1 is best summed up in the fact that out of the gross corpus of Rs. 2.78 crore created over 30 years, his own capital contribution is just 6.5%. The balance 93.5% has come from the power of the SIP. That surely settles the debate!