Systematic investment plans or the SIP are a great tool to invest, and it has helped create a significant amount of wealth over time. Some basic investment plans have the potential to create substantial wealth over time. Three basic principles work in favor of a SIP –
- Earlier you start investing; more is the return accumulated over time. This leads to more profits. This phenomenon is also known as the power of compounding in the financial parlance
- Time plays a crucial role in SIP than the timing. The earlier you start, the more you make; and longer you remain invested, the more will be the gain. This phenomenon also supports why a regular SIP has a better wealth ratio than a step-up SIP. For our novice readers, step-up SIP is where you tend to increase the amount of SIP every year when your inflows increases.
- To get the power of compounding, an investor needs to remember two things. Firstly, leveraging the power of equities helps in the long run, and secondly, the accumulated profits should remain reinvested to reap further benefits.
Can A Small Sip of Rs.10,000 Make a Big Difference?
Yes, very much! Even a small amount can make a huge difference. How much difference can a SIP of Rs10,000 per month make to your wealth? The answer is that it can make a big difference if you continue the investment for the long-term in a disciplined manner without withdrawing any investments and investing the powerful asset class such as equities.
Now, the question is, how much wealth can be accumulated?
For the answer, consider the chart below.
How the monthly SIP of Rs 10K grow over 20 years
As can be seen from the above chart, a SIP of Rs 10,000 can grow your wealth to Rs 2.3 crore in 20 years. We have considered the annual return to be around 18%.
18% may look on a higher side, but remember when you have a long-term horizon such as 20 years, you can avoid the conservative plan altogether. If you have a conservative approach with a long-term horizon, it is nothing but not utilizing the true potential of capital. Ideally, your risk appetite and investment horizon should trickle down to your expected returns. Also, risk appetite should be computed by taking into account the cash inflow, minimum essential expenditure, age, number of dependents, and the likes.
How to choose the SIP instruments?
Once you have understood your risk appetite and investment horizon, you need to map the same with the funds. Equity funds are best suited for horizon over five years, particularly the ones that invest in the mid-cap and the small-cap names.
Team Tarrakki has mapped the ideal time horizon and risk levels for the different funds’ category (refer to the table below).
Considering the same, let us see the kind of corpus you may make when your risk appetite differs.
If you see in the table above, the returns are highest in the high-risk category, and even a small amount of Rs 10000 per month for 20 years could help you fetch nearly 10x wealth in 20 years.
Should you invest Rs 10000 in one fund?
The answer is No. If you do that, you will get into concentration risk where your capital will be invested only in one fund. Remember, you need to have a diversified portfolio so that you can take the benefit of each of them and at the same time, reduce the volatility at the portfolio level by having smaller portions in each.
Ideally, you should select 3-4 funds for making it Rs 10000 per month.
At this juncture, let us introduce to you a very cool feature of your very own app Tarrakki – the investment strategies. The investment strategies in Tarrakki is devised to ensure you invest systematically over the very long-term/long-term/short-term/very short-term for both wealth creation, tax saving, and emergency corpus build up. Besides, the investment strategies section also highlights the conservative, moderate, and aggressive risk profiles and accordingly recommends the funds for investment. The tool uses its proprietary AI-backed engine that goes through multiple permutation and combination before throwing any funds that would suit the best to an investor. Not to mention that every result is back-tested to ensure that the Tarrakki recommended funds does a great job in outperforming the benchmark and inflation by considerable margins.
The following are some of the funds recommended by Tarrakki that an investor could look at if he/she is willing to invest in the long-term and has a high investment horizon of 20 years and a high-risk appetite. The above mentioned Rs 10000 SIP could be invested in the following funds to achieve the 10x growth –