When should you start your SIPs?

Over the past couple of years, the popularity of Systematic Investment Plans (SIPs) has gone up. Equity mutual fund schemes have seen huge inflows through SIP route. AMFI data shows that the mutual fund industry had added about 10.05 lakh SIP accounts each month on an average during the FY 2018–19 and currently Indian mutual funds have about 2.49 crore (24.9 million) SIP accounts. SIP contribution amount for FY-19 stands at Rs 52,472 crore. Yet, we often hear people wondering how much should they invest? What is the right time to start investing? Should they wait for market correction or wait for volatility to pass? We get you answers.

The fact is investors lose more money in waiting for correction than in the correction itself. SIP is a tool that by design benefits from volatility, disciplines your investments and helps in building a bigger corpus over a longer period. So right now is the right time to start your investments. A delay of couple of years can be a huge opportunity loss. The earlier you start the higher will be the corpus you will build owing to power of compounding.

Two friends Mohan & Sohan start working at the age of 24 and have similar salary. Mohan doesn’t want to hurry as he is waiting for the right time to invest and he is also planning on investing a higher amount than what his current salary permits him. On the other hand, Sohan prefers starting investments with as little amount as he can and he is not worried about timing the market because he wants to be invested for a longer time period.

So Sohan starts investing Rs 10,000 per month at the age of 25 and Mohan starts investing Rs 20,000 at the age of 35. The long period average of NSE Nifty 50, one of the benchmark indices in Indian equity market, is ~ 13% CAGR. Therefore assuming SIP investments to deliver 12% CAGR would be a realistic assumption.

When they both reach the age of 50, Sohan would have invested Rs 30 Lakh & Mohan would have invested Rs 36 lakh. But Sohan’s corpus stands at Rs 1.9 crore and Mohan’s corpus stands at Rs 1 crore.
Surprise! Surprise!

In next 5 years, Mohan’s corpus at the same rate will become Rs 2 crore and Sohan’s corpus will become 2.8 crore. The other important parameter here is consistency. Investors typically get emotionally attached with their investments and tend to stop their investments at the first sight of volatility. While the truth is the probability of losses or negative returns is close to zero over a long term period. To support our thesis we analysed long period returns of NSE Nifty 50, and results are as below:

RupeeIQ Take: We strongly recommend investors to start early, invest consistently and forget about timing the market. However, it is also important to evaluate the performance of the underlying scheme with its peers. Staying invested in a bad performing scheme would not yield desirable returns. We suggest investors review performance of the schemes in their portfolio and rebalance it if required once a year. Investors can start with as little as Rs 500 a month. Discipline and diligence in investing is more important than timing the market.

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