Small SIPs May Be Insufficient To Meet Your Goals

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 neighbors 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.