If you had started a monthly SIP of Rs 10,000 in a middling
equity fund 15 years ago, you would now have Rs 57 lakh in that investment.
While this may seem like a miracle for those who are used to bank fixed
deposits and Public Provident Fund (PPF) returns, by the standards of long-term
investments in equity funds, this is nothing remarkable. In fact, a top fund
would have yielded Rs 65-70 lakh. But let us just focus on a thoroughly average
one for the moment, because I want to make a different point in this
column.
Nowadays, a lot of investors have long-running SIPs.
Although 15 -year uninterrupted SIPs are still not common, they definitely will
be in a few years, because the SIP culture really started taking hold only
about seven or eight years ago. While the net result of the SIP phenomena is
great, one can't help but notice that far too many investors are taking SIPs in
what I would call ?homeopathic doses'.
I met someone just last week who has a five-figure monthly
income, but has an SIP of Rs 3,000 a month in an equity fund. This is a prime
example of what many investors are doing. They are faithfully investing though
SIPs for long periods, but with investment levels that will not have a material
impact on their financial well-being. Investing 3% of your income in an
equity-backed asset class means that it's going to serve as little more than
entertainment.
In comparison to what you invest, you might eventually be
very impressed by the returns generated, but it will not make a difference to
your life. A few days ago, a couple who are former neighbours came to me to
discuss their investments. They have put 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 around Rs 2,500. They increased this sum marginally 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 a negligible monthly sum has resulted in an
accumulation of that much money. However, if we consider the bigger picture,
which is their financial situation over decades of retirement, Rs 12 lakh is
inconsequential. The rate of return is great but the actual sum is too little
for it to turn into a comfortable amount.
An equally unproductive situation is that of a saver who
started off with a substantial sum but never increased the monthly investment.
Consider a person who started an SIP of Rs 10,000 a month in 2004, and is still
at the same amount. In 2004, this was 20% of his income, now it's about 7%.
Look at the first example. Over 15 years, Rs 10,000 a month became Rs 57 lakh.
However, a small increase of just 5% a year in this amount would have resulted
in a final figure of Rs 71 lakh. For most savers, their income would increase
in tandem, ensuring that they hardly feel the increase in the SIP amount. And yet,
this would have a big pay-off at the end, when you redeem the investment.
So, the idea I'm trying to get across is fairly
self-evident. For an investment to meet your financial goals, a high rate of
return alone 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 want to
try things out at a low intensity, to just dip your toes into the water, so to
speak. However, there's no point to just keep your toes dipped for a decade or
so. If you like the water, jump in after a year or two.
The author is CEO,
Value Research.
Source: Economic
Times Wealth
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