You must have heard the story of the ant and the grasshopper. Knowing that the winters are approaching, the ant, along with the others in her colony, works hard to gather food grains and store them. The grasshopper sees the ant working and mocks her. He believes that one should enjoy one's present and not worry about the future. He also finds it futile to look for single food grains and accumulate them. After all, how much can one gather doing that? The ant tries to persuade the grasshopper that he should also make provisions for the future, lest he would not find any food in the winters. But the grasshopper turns a deaf ear to her advice. When the winters arrive, the ant has accumulated more than enough food. A severe winter and the snowfall covers all vegetation, leaving absolutely no food for the grasshopper. Out of hunger, he falls unconscious. When the ant gets to know about that, it offers food to the grasshopper, thus saving his life.
It would not be wrong to call the ant an SIP investor. She kept accumulating grains - one at a time - and eventually reached a stage where she had enough for the full season. She realised her goal through small investments. For the grasshopper, the contributions were too minuscule to make any appreciable difference.
While SIPs may look small at the time you make them, over time they accumulate to become a large amount. When you make those SIPs in an equity fund, you also stand to gain from capital appreciation over the long run. For instance, if you invest Rs 5,000 monthly in an equity fund that returns 12 per cent, in 10 years you will have accumulated Rs 11.62 lakh. This amount is almost magical to someone who only sees the end result.
No matter how formidable your goal may appear, you can start saving towards it. Just break it into small parts and this is what SIPs do for you. They help you overcome the inertia that may develop by just looking at the sheer size of the corpus required. However, do revise your SIP amounts regularly as your income increases. This will help you accumulate the desired corpus faster. Also, if your SIPs weren't enough for the goal amount, you can make up for the shortfall. In the above illustration, if you also increase your SIPs by 10 per cent annually, you can accumulate Rs 15.36 lakh.
We all have multiple goals to accomplish: retirement, children's education and weddings, buying a house or a car, vacation and so on. It's advisable that you run separate SIPs for each goal. This will help you gauge your investment in a better way. Choose the right category of funds for each goal, depending on its timeline. For goals that are more than five years away, go for equity funds. For goals that are three to five years away, equity-savings and conservative hybrid funds can do the job. For goals that are one year to three years away, accumulate your corpus in short-term debt funds. For goals that are due in the next one year, ultra-short-duration funds or liquid funds are just fine.
While investing in equity, go through the SIP route. This will ensure that you don't invest all your money at a market peak. And last but not least, be disciplined with your SIPs and have faith in them.