Awareness about investing in equities is gaining pace among investors with constantly rising equity markets and lower than average returns from other asset classes. Even though equity has the potential to generate returns above other asset classes in the long-term, what one must remember is that equities are subject to constant volatility. Investing systematically is a better way to approach this volatile asset class. SIPs come with the synthesis of cost averaging and power of compounding the returns on accumulated units. This blend leads to wealth creation over longer periods.
That apart, SIPs help to plan for life goals like retirement, children’s education, marriage and also for emergency needs. Having a variety of ‘known’ goals and not taking any steps towards preparing for them, builds unwanted anxiety, as we move closer to the future. Systematic investing mirrors the income flow of salaried, professionals or a typical regular income earners. It helps to channelize the investment at the same pace of inflow, which otherwise are exposed to the danger of staying idle or prone to be spent and exhausted.
It is always sensible to inculcate the habit of investing the regular surplus periodically. If starting an SIP is important to achieve the goals, it still only serves the purpose partially. The key is in continuing the SIPs. We come across instances where investors unknowingly, and at times knowingly, give a miss to the SIP instalments in between. The probable thinking is, ‘… I am just missing few installments, what’s the big deal?’. In fact it is a big deal and makes a huge difference, as SIP investing involves compounding effect in the long run.
Ideally we should start to plan for a goal by keeping an approximate future value and expected returns in mind and then start an SIP suitable to reach that goal. While missing an SIP, what start as lighter excuse might end up repeating itself leading to missing out on major wealth creation opportunity. Missing some SIPs, will have a direct impact on the expected future value and hence would have a mismatch on the total plan itself.
The below table illustrates the difference in expected maturity value of an investor who continued with the SIPs and another who misses SIP here and there every year. SIP of Rs. 5000 per month in BSE-SENSEX from January-1999 to December-2018.
As can be observed from the illustration, Rs.5,000 per month invested for 20 years in Sensex from Jan-1999 till Dec-2018 had the potential to grow to a market value of Rs.50.84 lakhs. On the other hand, if some 3 months of SIP are missed every year, then the Market value dropped to Rs.37.69 lakhs. In other words, a 25% miss on the instalments (60/240) had created a near 26% hole in the potential wealth (13.147/50.845) or 36% lesser than what it could have grown to. What if those missed months were lower market levels? – The gap would be further higher. If this SIP were for retirement, the miss would prove very costly. The time lapsed can’t be brought back with any amount of money. Hence it is only prudent to continue the SIPs. Time contributes to wealth eventually and invisibly (but visible in result).
Many investors today understand the importance of goal planning and the process to plan for it. But continuing the thought process in action only will take us to the desired results. So continue your SIPs. Don’t let small slips cost you a lot.
Posted: July, 2019.