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Continuing with an SIP for a long duration does not help unless the right amount is invested


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If, for the last 15 years, you had done a monthly SIP of Rs 10,000 in a middling equity fund, you would have had Rs 57 lakh in that investment now. While this may seem like a miracle for those used to bank fixed deposits and PPF returns, by the standards of long-term investments in equity funds, this is nothing remarkable. In fact, a top fund would have resulted in Rs 65 to Rs 70 lakh but let's just focus on a thoroughly average one for the moment because my point in this column is something different.

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Nowadays, a lot of investors have long running SIPs. Fifteen years of uninterrupted SIPs may still not be common but they will be in a few years down the line as SIP culture has started taking off since the last seven to eight years. While the net result of the SIP phenomena taking hold is great, one can't help notice that far too many investors are taking SIPs in what I would call homeopathic doses. For example, I met someone only last week who has a five-figure monthly income and has an SIP in an equity fund of a paltry amount of Rs 3,000 a month. This is a prime example of what many investors are doing. They are faithfully running SIPs for long periods, but with investment levels that will not have a material impact on their financial well being. Investing 3 per cent of your income into an equity-backed asset class means that it's going to be little more than entertainment.

In comparison to what you invest in other instruments, you will eventually be very impressed by the returns you get from SIPs, but it will not make a marked difference to your life. A few days ago, a couple who are former neighbours came to discuss about their investments with me. They have put in a reasonable sum of money into their savings over the years, but almost all of it in bank fixed deposits. On my advice, they started an SIP in a good balanced fund some fifteen years ago, investing some Rs 2,500. They increased this sum slightly a couple of times. However, now, when they need to gather up their investments and plan their post-retirement life the total sum is not very significant. That balanced fund investment is worth about Rs 12 lakh now and they are quite amazed that a negligible monthly investment has resulted in an accumulation of so much money. However, in the larger picture of their financial situation over decades of retirement, Rs 12 lakh is neither here nor there. The rate of return is great but the actual sum is too little to be of meaningful comfort.

An equally unproductive situation is of a saver who started off with a substantial sum but never increased the monthly investment. Someone who started off with an SIP of Rs 10,000 a month in 2004 is still at the same amount. In 2004, this was 20 per cent of his income, now it's about 7 per cent. Look at the first example. Over 15 years, Rs 10,000 a month has come up to Rs 57 lakh. However, a small increase of just 5 per cent a year in this amount would have resulted in a final figure of Rs 71 lakh. Most savers' income would increase at a rate that they would hardly feel an increase in the SIP amount of 5 per cent once a year. And yet, this would show a big payoff at the end, when it comes to redeeming the investment and using the money.

So the idea I'm trying to get across is self-evident. For an investment to meet your financial goals, just a high rate of return is not enough. It must have a chance to reach the actual amount that will help you move towards that goal. As savers shift from India's endemic fixed-income mentality to equity-backed investments, it is natural to just try out things at a low intensity, to just dip the toes into the water, so to speak. However, there's no point to just keep one's toes dipped for a decade or so. If you like the water, jump in after a year or two.

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