The other day, I got an email from an investor saying that he had read an article that said that if one increased one's monthly SIP amount by 10 per cent every year, then the final value would increase by 45 per cent. The investor wanted to know whether this was true and if it was, then should this ten per cent increase be a simple increase or a compounded one. I didn't know what to say. At one level, this is almost funny because what the said article is basically saying is that if you invest more, you'll get more money eventually. That's hardly rocket science, and the maths in any case is highly suspect.
This is yet another example of way the financial services industry--and the financial media--does is to regularly take simple and effective idea and then complicate it. SIPs are a very simple idea. You invest a fixed sum regularly in an equity fund, regardless of market conditions. Over a long-term, you end up buying more units when the markets are down and fewer when the markets are up. Thus your average purchase price is lower than what it would have been otherwise. Therefore, when the time comes to redeem your investments, they are worth more than what they would have been. That's all there is.
But as I've often written, the value of an SIP is not just in the maths, but in the psychology. Enhancing your returns is the simplest thing in the word when all you have to do is to choose a fund, decide on how much you want to invest and forget about it. In practice, the real value is in saving you from having to think about what's happening in the market, and investing regularly.
There are a variety of ways in which funds and advisors are trying to reinvent the wheel and making it look better. However, they do little except to destroy the simple usefulness of the idea.
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