Rs 1,000 monthly SIP for 30 years: How Rs 3.6 lakh grows into Rs 34.9 lakh

Investing Rs. 1,000 every month in an Equity Systematic Investment Plan (SIP) over 30 years, assuming an average return of 12% per annum, could turn a total investment of just Rs 3.6 lakh into a massive portfolio value of Rs 34.9 lakh, shows an analysis by FundsIndia. 

 

Systematic Investment Plan (SIP) is an automated investment plan that helps you invest a fixed amount into your chosen mutual funds at regular intervals. It works similar to a recurring deposits in a bank and is super convenient as the amount is automatically moved from your savings bank account to your chosen mutual fund at the chosen intervals (daily, weekly, monthly, quarterly etc).  While the frequency is up to you, monthly SIPs are the most popular as they can be aligned with your salary cycle.

 

"SIPs help grow wealth with the power of compounding i.e you make returns not just on the invested amount, but also on the gains earned as the gains get reinvested back into the fund. By investing regularly through an SIP, you are allowing smaller investments to build gradually over time into a large sum. Longer your money stays invested, Larger the multiplier effect of Compounding," noted the analysis. 

 

How has Equity SIP Performed in the past? 

 

Note:

 

Investing in the equity markets is often about timing—knowing when to buy at a "bad," "good," or "great" price. While these terms may sound straightforward, the reality is that we only know whether a price was "bad," "good," or "great" in hindsight. This is where Systematic Investment Plans (SIPs) become a game-changer. 

 

Bad Price: This happens about 10-20% of the time, and it often leads to lower long-term returns as you're buying at a high point in the market.

 

Good Price: The most common scenario, occurring about 60-80% of the time, where prices align with the underlying earnings growth of companies, offering reasonable long-term returns.

 

Great Price: Occurring about 10-20% of the time, when you buy equities at a very favorable price, leading to phenomenal returns.

 

The Role of SIPs in Navigating Market Fluctuations

Since equity markets are constantly fluctuating, the challenge for investors is figuring out the right price to buy at. However, SIPs offer a solution. With SIPs, you invest a fixed amount every month, no matter the market conditions. This removes the need to time the market perfectly.

 

While SIPs do mean that at times you will buy at "bad prices" and other times at "great prices," the beauty of SIPs is that the "great prices" you buy at usually compensate (and often overcompensate) for the "bad prices." Over the long term, SIPs help average your buying price to "good prices," leading to consistent and decent returns.

 

How SIPs Help Achieve Better Returns

Here’s the magic: SIPs smooth out the highs and lows by allowing you to buy more units when prices are low (during "bad" phases) and fewer units when prices are high (during "great" phases). This systematic approach reduces the impact of market volatility, helping you average your investment cost closer to a "good" price in the long run.

 

A study by HDFC Mutual Fund shows that, over a 15-year period, SIP investors would have achieved a 20% higher return than a lump sum investor by averaging their entry price through consistent monthly investments. Over 30 years, SIPs helped reduce the effect of market fluctuations by averaging out buying prices, ultimately leading to significant wealth creation.

 

Real-World Example

In the last decade, investments made during market "great" price periods saw returns of over 15%. On the other hand, during "bad" periods, the returns were sub-10%. Despite the ups and downs, SIP investors ended up with returns closer to what would have been expected had they invested at "good" prices throughout. The disciplined approach of SIPs minimizes the risk of poor timing and maximizes potential gains over the long term.  "The idea of SIP is to provide a good return experience over the long term by deliberately doing something slightly inferior (read as buying at bad prices for a small % of the times) to avoid the likelihood of doing something very inferior (trying to manually time the entry 100% of the times).  This small % of inferior buys is compensated over and above by the small % of great buys a SIP carries out during market falls. Thus the whole success of SIP depends on whether you are able to continue your SIPs in a disciplined manner over the long term without panicking and stopping them during a market fall," noted the report.