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Is your SIP a mere ritual?

Unless your SIP is of an amount that will make a material difference to your financial future, it may be pointless


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If for the last 10 years, you had done a monthly SIP of Rs 10,000 in a middling multi-cap equity fund, you would have had Rs 24 lakh in that investment now. While this may seem like a miracle for those used to bank fixed deposit and PPF returns, by the standards of long-term investments in equity funds, this is nothing remarkable. In fact, a top multi-cap equity fund would have resulted in somewhere around Rs 30 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. Decade-long uninterrupted SIPs may still not be very common, but they will be in a few years because SIP culture really started taking hold about seven to eight years ago. While the net result of the SIP phenomena taking hold is great, one can't help but notice that far too many investors are taking SIPs in what I would call homeopathic doses. For example, I met someone just last week who has a monthly income of around a lakh and an SIP in an equity fund 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 in an equity-backed asset class means that it's going to be little more than entertainment.

In comparison to what you invest, you will eventually be very impressed by the returns you generate, but it will not make a difference to your life. A few months ago, a couple who are former neighbours came to me to discuss their investments. 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, that balanced fund investment is worth about Rs 12 lakh. They are quite amazed that what was a negligible monthly sum has resulted in an accumulation of that much money. However, in the larger picture of their financial situation over decades of retirement, Rs 12 lakh is basically nothing. The rate of return is great but the actual sum is too little to provide 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. Most savers' income would increase at a rate that they would hardly feel an increase in the SIP amount of 5% once a year. And yet, this would show a big payoff at the end, when you go to redeem the investment and use the money.

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 one's toes into the water, so to speak. However, there's no point in just keeping one's toes dipped for a decade or so. If you like the water, jump in sooner rather than later.