Smart SIP Tip: When the Market Hits the Highs, Hold onto those SIPs

*Please note that the quotes shown will be from our partners

‘Slow and steady wins the race’… Steady being the important word for us over here.
We are very familiar with the story of the tortoise and the rabbit. The steady one wins at the end. The same concept works in the case of wealth creation as well.

Let’s try to understand how Systematic Investment Plans (SIPs) work, before we delve into further details…

An SIP or Systematic Investment Plan is a mode of investing money in mutual funds. This is a planned approach that helps you inculcate a habit of saving and creating wealth for the future.
A flexible and easy to implement investment plan, SIP auto-debits money from your account to invest into the market. Then, a certain number of units are bought from your invested sum, based upon the market rate of the day.

So every month, week or quarter, you take a chunk of your salary and save it. In the long run, you also multiply it, for various goals that you might have in mind like retirement or your child’s education.
Basically, by investing in SIPs, you’re introducing yourself to a whole new discipline of saving.

But this discipline of saving comes with a compound advantage as well. All the wealth that is invested is compounded at the average annual growth rate. And the rule for compounding is simple—the longer you give your investment, the more time it has to grow. And, it will grow at an accelerated rate as well.

Let’s Try to Understand How Compounding of your Investment Works:

If you invest Rs. 6000 a month starting from your 40th birthday, in 20 years’ time you would have put aside Rs. 12 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 26.3 lakhs when you reach 60.

However, if you start investing 10 years earlier, your Rs. 6000 each month would add up to Rs. 18 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 60.6 lakhs on your 60th birthday - more than double the amount you would have received if you had started ten years later!

Amount Invested per month

Time Period

Total Amount put aside

Growth Percentage

Final Amount Earned

Rs. 6000

20 years

Rs. 12 lakhs

7%

Rs. 26.3 lakhs

Rs. 6000

30 years

Rs. 18 lakhs

7%

Rs. 60.6 lakhs

 

From this example, we can easily understand how compounding works, and how it gets better as the time period increases.

Benefits of investing in SIPs:

Apart from the saving discipline and compounded return, let’s look at a few more benefits of investing in SIPs:

Flexibility- It is generally advisable to hold onto SIPs for a long term, but that is not a compulsion. Any Systematic Investment Plan can be discontinued at any point of time. One can also increase/decrease the amount being invested.

Long-term Gains- Due to the power of compounding, SIPs have the potential to deliver substantial returns over a longer time duration. And as the time increases, the compounding also accelerates.

Convenience- It is a hassle-free mode of investment. Issuing a standing instruction to your bank facilitates auto-debits from your bank account. And this amount can be adjusted as per your liquidity status.

Advantages of SIPs

Advantages of SIP

If we look at the biggest advantage of SIPs, especially for first timers, then it is that one need not time the market. Investing every month ensures that one can make the best out of an opportunity that could be tough to predict in advance. Hence, no expertise in the working of bears and bulls of the market is required.

Now, let us look at an important underlying factor that will help us understand the concept and working of SIPs better—Rupee Cost Averaging.

Rupee Cost Averaging

Every time the market takes a plunge, in the same invested amount, the investor ends up buying more units of the scheme. And so, when the unit price goes up, he accrues a gain. This is better known as rupee cost averaging.

Rupee Cost Averaging

Invested amount per month

Ongoing market rate

No. of units bought

10000

25

400

10000

10

1000

10000

20

500

10000

17

588

10000

25

400

 

Now, let’s extend this knowledge to understand why we should keep buying in a rising market.

Even when the market is bullish, your monthly/quarterly/weekly investment is fixed, so you just buy fewer units of the stock. However, adding to that amount will be your gains from the units bought when the market fell.

You may Like to Read: How To Invest Through SIP

One thing that is very important to remember while investing in SIPs is that your investment can result in losses too. There is a misconception that the return from SIPs is always positive. SIPs do help in averaging out the investment cost but it does not mean that the capital is protected. Everything depends on the market, if the market is doing well then SIP returns will be good; and if it crashes then the losses will also be unavoidable.

With SIPs, your investment in equity funds is well spread out over a period of time, so that you don’t accrue a big loss. Hence, you should not pay great heed to the market fluctuations and continue with the investment amount month after month. Holding onto this discipline in the long run will help you create wealth and achieve your goals.

For any common investor, shelling out a huge amount of money in one go would be hard, but making a monthly instalment towards investing is quite possible. This is another reason why SIPs are the suggested investment for small investors. 

Investment in SIP

So, whether the market is rising or falling, make sure that your predetermined investment amount does not falter. The worst thing an investor can do to his/her portfolio is discontinue when he feels the immediate returns aren’t as expected. Systematic Investment Plans are meant for the long term goals, and for good returns, accumulate as much wealth as you can in the long run.

Collapse