All roads to wealth creation go through SIPs

The Roman Empire was one of history's greatest civilisations, and its roads were a marvel of engineering. At its peak, Rome was the heart of a vast network of highways that connected distant lands - facilitating trade, governance and military movement. While not every single road physically led to Rome, the empire's road system was designed in a way that made the city its focal point.

This concept gave rise to the famous saying, "All roads lead to Rome," symbolising that different paths can lead to the same destination.

Investing follows a similar principle. Whether you invest in index funds, flexi-cap funds or a mix of large-, mid- and small-cap funds, all roads should lead to wealth building through SIPs (systematic investment plans) .

Why should you invest through SIPs?

SIPs allow people to invest a fixed amount at regular intervals into a chosen mutual fund .

By investing through SIPs, not only do you inculcate the habit of disciplined investing, but you also mitigate the pitfalls of market volatility with rupee-cost averaging. This means that by investing consistently, you purchase more units when prices are low and fewer units when prices are high, thereby averaging out the cost per unit over time.

The problem with lump sum investing

Investing a large sum of money at once may seem tempting, especially when markets are at a low. However, timing the market is nearly impossible, even for the most seasoned investors.

Often, investors wait for the 'perfect' time to invest, only to realise that the best wealth creation opportunities have already passed. Some also invest when the markets are surging, only to see a downturn wipe out a portion of their capital soon after.

SIPs eliminate the problem of guesswork by helping you invest regularly, irrespective of the market conditions, letting your money compound over time.

Diverse routes, unified destination

To highlight the versatility and robustness of SIPs, we present eight investment scenarios that a beginner in the equity market is most likely to end up choosing.

In each, the investment period is 20 years, with a contribution of Rs 10,000 every month on the first working day (please note that the analysis uses historical data, so actual results will vary).

• Case 1: Investing 100 per cent in a Nifty 500 Index Fund.
  
• Case 2: Allocating 60 per cent to Nifty 50 and 40 per cent to Nifty Next 50.
  
• Case 3: Committing 100 per cent to an average flexi-cap fund
  
• Case 4: Investing 100 per cent in an average multi-cap fund (index considered as proxy).
  
• Case 5: Diversifying with 50 per cent in a large-cap fund , 25 per cent in a mid-cap fund and 25 per cent in a small-cap fund.
  
• Case 6: Allocating 50 per cent to a large-cap fund, 25 per cent to a mid-cap fund , 15 per cent to a small-cap fund and 10 per cent to the NASDAQ 100 (for international exposure).
  
• Case 7: Investing 100 per cent in a mid-cap fund.
  
• Case 8: Splitting 50-50 between a mid-cap and small-cap fund.

We chose the above cases due to their suitability for beginner investors. Though each has a unique approach to asset allocation, they all share a common thread: the potential for wealth accumulation through disciplined SIP investing.

What were the results?

An analysis of these cases reveals intriguing insights:

• Total corpus value: After a period of 20 years, the corpus values ranged from 4.3 to 6.5 times the total invested amount, indicating growth across all strategies. The Rs 1 crore mark gets crossed in all scenarios.
  
• Maximum decline during bearish phases: Despite severe market downturns, rupee cost averaging protected the corpus better than the benchmark indices. This indicates that a disciplined SIP approach can shield investors from the worst of market crashes.
  
• Maximum rise during bullish phases: Courtesy of maintaining a disciplined investment strategy, the portfolio growth during bull runs was exceptional, beating almost all the respective benchmark indices.
  
• SIP returns: Annualised returns showed that, despite variations in asset allocation, overall returns remained within a narrow range, proving the power of disciplined, long-term investing.

Mid and small caps outperformance: Not all that glitters is gold

In the scenarios where investors allocated heavily to mid- and small-cap funds, they achieved a corpus size between Rs 1.26 crore and Rs 1.57 crore. However, this came at the cost of increased volatility, which many new investors (our target readers for this article) would not be comfortable with.

Before considering jumping ship to mid- and small-cap funds, investors must understand the risks. For instance, during the Covid crash, even the top 10 funds in the mid- and small-cap categories (with at least 10 years of history) generated an 8 per cent return over a 10-year SIP - barely outperforming bank fixed deposits (FDs).

Investors who exited during the crash missed significant gains as the market rebounded. As of February 3, 2025, the top 10 mid and small-cap funds posted an average SIP return of 21 per cent over 10 years. However, due to the inherent volatility of the mid and small caps, these funds are suited only for investors with the right risk tolerance.

Actionable insights for investors

1. Start without delay : The best time to start investing was yesterday; the second-best time is now. Delaying investments can lead to missed opportunities.

2. Maintain consistency : Stick to your SIP plan, regardless of market fluctuations. Regular contributions are key.

3. Diversify thoughtfully : Tailor your allocation to your risk profile, but ensure diversification across sectors and market capitalisations for optimal returns.

4. Embrace patience : Wealth creation is a marathon, not a sprint. Allow your investments time to grow.

The last word

While asset allocation and the need for diversification are paramount, sometimes the lines get blurry while looking in the long run. Hence, we recommend getting started as soon as possible and embrace SIPs.

The gymnastics of asset allocation becomes all the more important if and when you have a larger corpus base, upon which even a minor percentage change could make you upset.

If you are someone who falls in the anxious investor bucket, we recommend including a portion of debt to cushion the equity market's short-term volatility.

Also read: Year's hottest fund vs KISS fund: Which strategy delivers higher returns?

This article was originally published on February 15, 2025.