Can't Time The Market? Here's How Mutual Fund SIPs Can Become Your Bestfriend For Investing In Equities

Are you a believer of how slow and steady wins the race? No matter how boring it may sound, constant efforts in the right direction are the key ingredient of the recipe to taste success in the long term, isn't it?

Especially when it comes to equity mutual funds, staying invested for long periods is what can separate you from the crowd, just like ace investors like Warren Buffett, Rakesh Jhunjhunwala. RK Damani, George Soros, Walter Schloss, Geraldine Weiss etc.

On top of that, wouldn¡¯t it be great if you could keep investing in equities and fetch good returns without putting a lot of strain on your finances or timing the market? Sounds interesting? That's exactly where SIPs (Systematic investment plan) can be your bestfriend!

Wondering how mutual fund SIPs can become your gateway to investing in equities? Read on to discover the same!

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1.Small and regular investments prevent stressing your finances

Given that SIPs make you invest a fixed (small or big as per your choice) amount at a preset date and frequency (whether weekly, monthly, quarterly etc.), it helps build up the habit of regular and disciplined investment gradually. Regardless of the current market scenario and the NAV of the mutual fund, you get to keep on investing on a continuous basis for the target corpus and investment horizon.

This way, the habit of investing gets inculcated, which helps your overall financial health as well, besides helping achieve the set financial goals timely!

2.No need to find the 'right time' to enter or exit the market

The presence of rupee cost averaging concept makes the SIP route a suitable investment for both existing and new investors. This concept does so by averaging out the cost at which the investor purchases mutual fund units over a period of time. This way, through market volatility, investors automatically end up purchasing more units when the markets are at low points, which translates into lower average NAVs over time, especially over the long term.

On the other hand, if you decide to invest lump sum instead of SIPs, you need to time the market properly. In case you catch the equity market at a high point, you would end up investing at a higher NAV, which would reduce your gains when the market falls.

That is why SIPs turn out to be a more suitable option when you don't possess the knowledge, lack financial discipline and/or don't have adequate time to research the market in order to time it.

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Also Read: Should You Include Debt Funds In Your Equity Heavy Mutual Fund Portfolio

3.Enhances the power of compounding

More often than not, history has been witness to how equities have consistently provided inflation-beating returns in the long run, unlike its peers such as PPF, NSC or tax saver FDs which that sub-optimal returns. Especially when it comes to accumulating a big corpus for crucial financial goals such as down payment of your home, child¡¯s higher education corpus or your retirement corpus, keeping a disciplined approach through SIPs will certainly help to reap the benefits of compounding.

Simply put, the power of compounding not only allows you to earn returns, but also re-invests your earnings (interest/dividend plus principal). This implies that you get to earn on both your principal as well as on your returns that were reinvested into your principal. And the longer you stay invested, the higher would be the power of compounding!

Let's take the help of SIP calculators and have a look at these examples to help you get a fair idea about the importance of remaining invested for the long term to unlock the power of compounding.

Assuming a conservative return of 12% p.a. from equity mutual funds, here¡¯s how much you are likely to earn as returns (approximately) after investing different amounts through SIP for different time periods.

Rs 5,000 per month for 2 years-Rs 1.35 lakh (you invested Rs 1.2 lakh)

Rs 5,000 per month for 5 years-Rs 4.08 lakh (you invested Rs 3 lakh)

Rs 5,000 per month for 7 years-Rs 6.53 lakh (you invested Rs 4.2 lakh)

Rs 5,000 per month for 10 years-Rs 11.5 lakh (you invested Rs 6 lakh)

Rs 5,000 per month for 15 years-Rs 24.98 lakh (you invested Rs 9 lakh)

Now let's take a higher SIP amount as example.

Rs 20,000 per month for 2 years-Rs 5.44 lakh (you invested Rs 4.8 lakh)

Rs 20,000 per month for 5 years-Rs 16.49 lakh (you invested Rs 12 lakh)

Rs 20,000 per month for 7 years-Rs 26.39 lakh (you invested Rs 16.80 lakh)

Rs 20,000 per month for 10 years-Rs 46.46 lakh (you invested Rs 24 lakh)

Rs 20,000 per month for 15 years-Rs 1 crore (you invested Rs 36 lakh)

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4.Offers the option to step up, pause or exit

SIPs offer liquidity and flexibility in investment as investors can set the frequency and dates of SIPs as per their financial position and convenience. When you have decided upon the specific financial goals and desired corpus¡¯ amount for which you need to invest, you need to decide the frequency of your SIP (such as monthly, quarterly or annually) after factoring in your existing income as well as recurring expenses.

Moreover, investors can also stop their SIP in case they want to redeem/exit the funds or in case they would not be able to service the SIPs anymore. Some mutual fund houses may offer the facility to pause the SIP for some time. Else, investors can stop/exit and then start a fresh SIP later, whenever their finances allow them to.

And that¡¯s not all. Some mutual fund houses allow investors to decide the top-up/step up amount/percentage as well, if they wish to gradually increase the SIP amount over the period of chosen investment horizon.

Also Read: Debunking Mutual Fund Myths

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