How SIPs work to increase your wealth

Manoj jokingly asks Madhur what was he going to do with the huge increment that he has got. Madhur said he had various kinds of responsibilities, such as the education of his child so he has to plan for it. Manoj said that he was talking exactly about that. When he has extra money at hand, then he should plan for his child’s higher education by investing in SIP of some equity mutual fund.

Madhur replied that he was thinking of putting money in SIP but the share market is making new highs, so in that case is it the right time to open SIP?

Madhur, also started wondering that it can be the case.

The stock market is continuously setting new records of highs. Last week, the Sensex also crossed the 67,000 mark, which is good news for those who have already invested in equity mutual funds. On the other hand, whether you are a new investor or an existing investor looking to achieve certain financial goals, you might be wondering if this is the right time to start a Systematic Investment Plan in mutual funds.

Generally, investors believe that if they invest during a bull market phase in the stock market, they may receive lower returns as the potential for further growth may be limited. Now, let’s understand in detail how a SIP works.

SIP is a method through which you invest a fixed amount regularly every month in a particular investment instrument. Most people prefer to invest in equities (shares) through SIP. The benefit of SIP is that even by investing a small amount like 500 or 1000 rupees every month, you can accumulate a substantial corpus over time.

The design of SIP works in such a way that when the market is at a higher level, you receive fewer mutual fund units in your account, and when the market is lower, you receive more mutual fund units. In this manner, with the help of SIP, you can average the cost of your investments and potentially maximize your returns.

For example, if Madhur decided to invest in an SIP of Rs 10,000 every month and continued investing for the next 12 months, he would have invested a total of Rs 1,20,000. During this period, the stock market kept rising continuously, and his SIP worked as follows:

In the first month, when the Net Asset Value (NAV) was Rs 10, he received 100 units for his Rs 10,000 investment. In the second month, as the NAV increased to Rs 11, he received 909 units. This way, by the twelfth month, the NAV reached Rs 21, and total units accumulated in his account were 8,164. Consequently, the value of his mutual fund holdings reached Rs 1,71,442.

From this example, you can see that with a SIP investment of Rs 1,20,000 over the year, the value of the funds increased to Rs 1,71,442 due to the rising NAV. Despite the increasing NAV, Madhur continued to invest only Rs 10,000 every month, and his portfolio experienced significant growth.

Now, if the opposite happens, meaning if there is a continuous decline in the market or if the market experiences ups and downs, what will be the outcome? Let’s assume that in the first month, Madhur invested Rs 10,000, and the NAV was Rs 10 per unit, so he received a total of 1000 units. In the following month, the NAV decreased to Rs 9, and Madhur received 1,111 units for his Rs 10,000 investment. By the twelfth month, the NAV increased again to Rs 11, and he received 909 units. In the end, he had a total of 15,821 units, and the total value of his funds increased to Rs 1,74,040. This shows that even in a market with fluctuations, the investment of Rs 1,20,000 grew to Rs 1,74,040.

Shweta Jain, founder of Investography and a Certified Financial Planner (CFP), says, “When you are investing for a particular goal, it should not be based on the market. Even when the market is reaching new highs, keep investing for your goal and for the long term. Choose funds that align with your objectives. For equity investments, you can start with passive funds.”

One important thing to remember is that when the market is experiencing a bullish phase, it is wise to continue with your SIP or even consider starting a new SIP. Don’t think that during a market uptrend, you will get expensive units. If the market continues to rise, you will benefit, and if the market experiences a decline, you will get more units at a lower price. Hence, the essence of investing through SIP is that you don’t need to worry about whether the market is rising or falling.

Predicting the market’s movement is difficult, and attempting to invest according to market fluctuations can go against your objectives. SIP investors should remember that market fluctuations are normal and not something to be feared. Sometimes, investors buy at highs and sell at even higher levels when the market is on an upward trend. In such situations, don’t be anxious about market ups and downs. Focus on long-term investments, at least for a period of five years.

When you invest through SIP, you benefit from rupee cost averaging, as you keep investing at both higher and lower NAVs. The most crucial point to remember is that the stock market is uncertain, so there is no perfect time to start or stop SIP. No one knows when a trend of decline will start after a market high or when a new upward trend will begin. Hence, you can start SIP at any time without worrying about timing the market.