Power of Small SIPs
Introduction about SIPs
It is widely quoted that “Every drop in the ocean counts”
This is especially true when it comes to investing in mutual funds. Prospective investors often feel that it makes sense to invest once they have a substantial corpus or are able to save a considerable sum every month.
Most mutual funds enable investors to get started with a SIP of Rs 500 per month. One may feel that this is an insignificant amount. But over a period of time it makes a huge difference. Let us learn how:
Hardly pinches your pocket
Most of us spend some money every day in buying and eating a snack worth around Rs 15 or 20. Just by saving that amount enables one to start investing in mutual funds through SIP. That's how small an amount is required to get started investing through SIP
While we all love and deserve to spend our hard-earned money, keeping a small amount aside each month can go a long way.
How often do we spend Rs 500 just over a whim? We may decide to order through one of the many food delivery applications or may meet up with a couple of friends at a coffee shop. Before we realize it, we end up spending around Rs 500.
Thanks to rising income and higher standard of living, it doesn’t pinch as much as it used to.
After all, Rs 500 is what a couple of movie tickets or a couple of pizzas cost.
Most mutual funds allow investors to start investing with Rs 500 per month.
For an individual who has never invested earlier, starting off with Rs 500 per month is also a promising beginning. Therefore, this becomes a great way for new investors to begin as regularly investing Rs 500 per month over a longer period of time wouldn’t impact the investor’s wallet even if there is irregular income due to job loss or sabbaticals.
Magic of compounding
Investors would agree that Compound interest is one of the most powerful forces in the world! This is because of the impact it has on one’s investments. Investing over a longer period of time will create substantial wealth.
Investing just Rs 500 per month can result the following scenarios
- Over 10 years, CAGR of 12% will offer Rs 1.2 lakhs
- Over 10 years, CAGR of 15% will offer Rs 1.4 lakhs
- Over 10 years, CAGR of 18% will offer Rs 1.7 lakhs
- Over 20 years, CAGR of 12% will offer Rs 5 lakhs
- Over 20 years, CAGR of 15% will offer Rs 7.6 lakhs
- Over 20 years, CAGR of 18% will offer Rs 11.7 lakhs
- Over 30 years, CAGR of 12% will offer Rs 17.6 lakhs
- Over 30 years, CAGR of 15% will offer Rs 35 lakhs
- Over 30 years, CAGR of 18% will offer Rs 71.6 lakhs
Let us look at the illustrations which offer a CAGR of 12% across 10, 20 and 30 years. Over 10 years, the investment of Rs 500 per month turns out to be worth Rs 1.2 lakh. Over 20 years, it balloons up to Rs 5 lakhs and over 30 years it swells up to Rs 17.6 lakhs!
We don't lose our sleep
Over a shorter period of time markets tend to be volatile. Even after investing consecutively for 36 months, one may see that one’s portfolio is in red. If the invested amount is small, then a new investor is able to deal with this situation and not feel stressed about it. If a new investor starts a SIP with a larger amount in a small cap fund during a choppy market, the variance in portfolio can cause the investor to chicken out and withdraw his holdings much before the magic of rupee cost averaging plays out
As the performance of a mutual fund in which investor has started a small SIP improves, she acquires confidence to invest higher amounts.
Suitable for investors who are risk averse
There are individuals who only prefer saving in fixed income or debt instruments. Due to certain reasons such investors prefer the security of lower returns rather than the opportunity presented by equity funds to beat inflation. If they haven’t tasted the growth that an equity-based instrument brings in, introducing them to the same through small SIPs is a great idea.
Some investors may not stay through the course even though the monthly invested amount is tiny. Whereas some may realize the benefits of investing in equity-based instruments as well and may seek to increase the SIP amount.
Continue to invest in case of unforeseen circumstances
As the size of an investor’s portfolio increase, her confidence in the wealth creating ability of mutual funds increases. After experiencing market volatility and continuing investments regularly, the investor begins to appreciate the process of creating wealth by investing through SIP when the mutual fund portfolio starts growing. This offers a huge boost of confidence to the investor which may result in the investor bumping up her SIPs.
Acquire confidence to invest more over a period of time as our portfolio grows
We live in an uncertain world. Incomes have improved but job security, especially in private firms, is a big question mark. There may also be health related situations which may cause an individual to stop working for a while. We are also living in a time when individuals wish to make the most out of their lives. This includes taking a sabbatical to travel or quitting a well-paying job to start up.
During such scenarios, one may not receive a regular flow of income. Or the size of income could reduce. Small SIPs can still be kept going as they may not cause a huge dent in an investor’s pocket during such uncertain times.
Easier to develop habit of financial discipline
Financial discipline is rarely something we are born with. We have work on it. Let us take the example of goal-based investing. A newbie investor may start a SIP to invest a certain amount over 5 years to achieve a goal. However, after 18 months, this individual may be tempted to buy a new laptop and would be falling short of some amount. If this individual decides to redeem the corpus which has been created so far, he may not only loss the opportunity of creating more wealth but would also fall back on his efforts to achieve his goal. Therefore it is critical to adhere to financial discipline when it comes to investing. Starting small makes it easier to get used to this. It is worth creating a habit of putting aside a small amount. Over a period of time, this would make it easier to deal with following a discipline of investing larger amounts.
Claim tax benefits
Investors who are starting out their journey in the world of investment, can look at ELSS to not only help achieve financial goals but also save tax. ELSS stands for Equity Linked Savings Schemes. ELSS is riskier than the fixed income alternatives available for tax-saving under section 80C but has the shortest lock in period among all these options. It also offers potential of growth via equity.
Especially suitable for introducing young children and young adults into the world of investing.
According to a survey conducted by Pogo in 2016, Indian children received an average pocket money of Rs 555/- per month. Imagine as a 11-year old, one starts investing Rs 500 per month. By the time this person turns 31, she has a corpus of Rs 7.6 lakhs at a conservative CAGR of 15%. Of course, till this young investor turns 18, she can be represented by her natural or legal guardians. Anyone who disagrees can be told that Warren Buffet bought his first stock at the age of 11! Children and Young adults be introduced to investing through small amounts. We could educate them on importance of investing and saving. They can start keeping aside a small amount on a monthly or quarterly basis. If they do that for 10 years till they graduate, they can use this money for partly funding their higher studies or start ups or any other suitable opportunity.
Rome wasn’t built in a day. And neither is a huge corpus that can offer financial freedom. One can begin investing modestly and then slowly keep increasing SIPs without being influenced by noise. Once an investor signs up to ride several market cycles then there is no looking back. This is because the investor begins to understand the importance of continuously investing during good times as well as bad. Small SIPs are bound to do wonders to our financial health.