Investing in mutual funds via the systematic investment plan (SIP) mode is ideal for accumulating a decent wealth corpus. The power of compounding ensures that returns are made not only on the invested amount but also on the gains, considering these are suitably reinvested back into the mutual fund.
With the adoption of investment through a SIP mode, smaller investments gradually accumulate into a large sum in the long run. The basic thumb rule is that the longer the money stays invested, the larger its growth over a certain period.
An efficient strategy to maximise the wealth corpus via an SIP is by incrementally increasing the SIP every year, aligned with the rise in income. For instance, a monthly investment of Rs 10,000 with no annual increases equates to a portfolio of about Rs 76 lakh over 20 years, with an estimated 12% return.
However, in case the SIP amount is increased by 5% per year, the portfolio would grow to about Rs 98 lakh within the same 20-year span. With a 10% annual increment, the portfolio may appreciably double to Rs 1.3 crore, while with a 15% annual increment, it may jump to about Rs 1.8 crore.
This significant rise operates on the principle of an annual percentage increase on the previous year’s SIP amount. For instance, an initial Rs 5,000 SIP with a 10% annual increment would lead to a monthly investment of Rs 5,500 in the second year, which rises to Rs 6,050 in the third year, and so forth.
This way, yearly increments not only ensure a higher return but also a growing portfolio value: an unchanged annual investment of Rs 5,000 for a period of 30 years will result in a portfolio worth Rs 4.48 crore. However, with annual increments of 10% and 15%, its corresponding value can surge to Rs 6.6 crore and Rs 11.5 crore, respectively.
The core idea is that SIPs’ systematic investment combined with a yearly increase in the SIP amount channels the power of compounding, leading to a spectacular growth in the investment portfolio’s value over a period.
Ideally, an investor should invest in mutual funds through a SIP depending on their financial goals and risk appetite. For those with a high risk-taking capacity with a financial goal that is not in the near term, such investors can consider mid-cap and small-cap funds for potentially higher returns.
Similarly, those who are rank beginners in mutual funds or have a low risk-taking capability, then they should look forward to investing in large-cap funds, as they allocate the money to stocks of blue-chip companies.
The overall idea is to periodically increase the SIP amount to build a portfolio in a relatively shorter span.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
