SIP

Top Reasons Why SIPis the Best Investment Option for Salaried Individuals

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Did you know the secret mantra of creating wealth through systematic investment plans (SIPs) if you are a salaried person? In fact, there are 3 rules to adhere to.

  • Start SIP in an equity fund
  • Start as early as possible
  • Persist for as long as possible

If you follow these three rules in a SIP, it is very difficult not to create wealth in the long run. There is no rocket science about SIP investment. It is based on the simple rule of regular investments and rupee cost averaging. If you allocate a fixed sum of money each month (weekly, quarterly also possible) via SIPs, then in good months you get more value and in bad months you get more units. As you select the best mutual funds for SIP, remember this advantage of any SIP investment. It is like “Heads I win and Tails I don’t lose.”

How much can a SIP grow and how fast can a SIP grow?

When you grasp the fit of SIP investment into your long-term goals as a salaried person, you must be very clear about 2 things. Mutual Fund investment through SIP does not grow fast in the initial years.It gathers momentum after some years and that is why the benefits are best realized over a longer time horizon of 20 + years. That is when the back-ended momentum of SIP investing ensures that you get the benefit of the compounding and best mutual funds for SIP. But that is theory. Let us turn to the practical side of SIP investment. Consider this table below.

Investor Monthly SIP Start & End age Assumed CAGR (%) Total Investment Final Wealth
Investor A Rs5,000 20 y to 55 y 12% Rs. 21,00,000 Rs. 3.25 crore
Investor B Rs10,000 35 y to 55 y 12% Rs. 24,00,000 Rs. 99.91 lakhs
Investor C Rs20,000 45 y to 55 y 12% Rs. 24,00,000 Rs. 46.47 lakhs

Despite lower total investment, Investor ‘A’ has created substantially higher wealthsolely owing to longer time horizon where compounding did the magicand that has made all the difference. If you understand this, you understand the core of SIP investment.

Here’s how SIP calculation works –

M = P × ({[1 + i]^n – 1} / i) × (1 + i)

In the above formula –

  • M is the amount you receive upon maturity.
  • P is the amount you invest at regular intervals.
  • n is the number of payments you have made.
  • i is the periodic rate of interest.

As per the above example,

For investor A

P = 5000

n = (55 – 20) × 12 = 420

i = 12%/12 = 0.01

M =

M = 3.25 crore

Why SIPs are tailor made for salaried individuals?

To be fair, SIP investment is tailor made for anyone looking to create wealth for the long run. We all have dreams like leading a peaceful retired life, giving the best of education for our children, having a second home etc. Dreams need wings and that comes from money. You cannot earn all the money, so you need to make your money work harder for you. Let us look at some compelling reasons.

When in doubt, push out (SIPs and Rupee cost averaging)

Most salaried persons are not attuned to take too much risk in the market. Navigating market volatility is hardly their forte. What can they use to tide over this? Rupee cost averaging is one answer. When you are not prepared to handle volatility, you must adopt a systematic and disciplined approach. SIPs don’t bother you with the burden of estimating the tops and bottoms of the market. Instead, you just allocate a fixed sum of money to an equity fund each month and let equities as an asset class work for you.

When markets are up, you buy less units; and when markets are down you get more units. That is how rupee cost averaging works and that is your best insurance against market volatility.

Is power of compounding the eighth wonder of the world?

No less a person than Albert Einstein said so. What does that mean? When you invest and just keep reinvesting the returns, you earn two kinds of interest viz. Interest on principal and Interest on Interest. Let us look at Rs. 1 lakh growing at 14% annually over 10 years.

  Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
Total Interest 14,000 15,960 18,194 20,742 23,645 26,956 30,730 35,032 39,936 45,527
Compounded Interest 0 1,960 4,194 6,742 9,645 12,956 16,730 21,032 25,936 31,527
Simple Interest 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000

What does this table tell us? The second row shows compound interest and the third row shows simple interest each year. We have shaded seventh and eighthyear. Between these two years, the compounded interest per month is more than twice that of simple interest.

That means, the investor is now earning more as interest on interest, than interest on principal. That is when compounding starts gathering momentum.

Investment discipline; a little bit till you cannot break it

That is a quality of SIP that is often under-rated. If you wait for the day you have a surplus and then start investing, that day may never come. Instead, plan your SIP saving need and then work your budget around. SIP infuses in you the discipline to force savings into your budget. It forces you to start saving early, even if you start small.

It is not the size of the SIP but persistence that matters. That can only come from discipline. Start with the SIP in mindfirst andthen work other expenses accordingly.

A busy schedule, needs investing on auto mode

In a tough professional world, you have to invest your time in your career. You need an investment idea that works on auto mode. SIP Investment is one such idea. You just start the SIP and then the momentum and discipline do the rest. It is also literally on auto mode in that you can go for auto debit SIPs to ease your administrative hassles. Also, you can set your SIP date just a couple of days after your salary date, so debits can be on auto mode as part of your monthly budget.

We live in an uncertain world, so you want an investment that you can pause, stop, restart etc. SIP is one such investment mode that is immensely flexible. That is one more compelling reason for salaried individuals to seriously look at SIPs.

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