Will disciplined investment in mutual funds through SIPs over the long term help me create wealth?
Yes, of course. SIPs are meant to precisely do that. They are meant to help you stay the course and ride through the ups and downs of the market over the long term. Once you are able to do that, then there are fairly high chances of you earning a reasonable good rate of returns through equity investing.
Let me show some numbers to bring some conviction to this thinking. The graph below represents returns from SIP investing in multi-cap funds over blocks of 10 years. So, each point on the line graph represents the returns derived through the SIP mode of investing during each block of 10 years ending on that date. For example, the first value you see on the chart starts from June, 2017. So, the period covered here would be from June, 2007 to June, 2017, i.e. a block of 10 years and the return value is the returns earned during that period. You can see the maximum returns that one could have made from a fund in the multi-cap category, the average ones and the minimum ones. So that is how you can read this graph.
If you see that over these years, there was a high probability that you could have made SIP returns at a CAGR of about anywhere between 10-15 per cent and that is good enough. Of course, selectivity matters because in the worst-case scenario, there was a possibility of you earning negative returns at the time of a sharp market fall in March last year. But when the markets recovered swiftly, so did the SIP returns. But the broad point here is, yes there is a fairly good chance of you earning good returns through SIP investing. So you can look at the above graph and decide whether these numbers look compelling enough to you.
Having said that, we need to move beyond excel spreadsheets when we talk about generating wealth over a long period of time. Firstly, you would need to do a few more things than simply doing your SIP investing. One is that you will have to be disciplined and be at it and continue investing through the ups and downs of the market because often what people do is to selectively start and stop SIPs which works to their detriment over the long term.
Secondly, you have to be able to commit a reasonable amount of money to generate meaningful wealth. For instance, you come across investors who would be earning well over a lakh of rupees a month or even more, but they would be doing an SIP of say Rs 5000 per month. Now even if they remain disciplined through their investing journey and even if they end up earning a handsome rate of returns, probably it will not make a meaningful difference to their financial well-being, given the scale of their investments in the context of their financial circumstances. So it is important for you to be investing a reasonable sum of money in the context of your financial situation to generate meaningful wealth, wealth that makes a difference in your life.
Thirdly, you should look to increase your SIP amounts, along with an increase in your income. Often what happens is that you start investing a reasonable sum of money in the market. But over a period of time, your income increases, and if your SIP investments don't keep pace with it, then again you end up in the aforementioned situation of Rs 1 lakh income and Rs 5000 SIP amount, which is avoidable. Once you take care of these things, you are all set to create wealth.