How to Use SIPs to Create Long-Term Wealth

How Do SIPs Work to Create Long-Term Wealth?

To understand how an SIP for long term works to create wealth, let us take the example of the Nifty 50 Index. The Nifty 50 Index has a base date of November 1995 and a base value of 1,000.

Nifty 50: Wealth Creation Journey Since Inception

(Source: https://nsearchives.nseindia.com/content/indices/ind_nifty50.pdf)

The above chart shows how the Nifty 50 Index has performed over the long term since its inception. In the 29 years till 30^th September 2024, the index has risen to around 26,000. So, the index has multiplied investor wealth by 26 times, growing at a CAGR of 11.89% since inception.

While the Nifty 50 Index has created immense wealth for investors, the wealth creation journey was not linear. There were several small to big corrections (5 to 50%) on the way due to various events. In the long run, the market recovers from corrections and goes on to make new highs. Hence, you should always invest regularly in a disciplined manner through the SIP route with a long time horizon to create long-term wealth.

Power of Compounding in Long-Term SIP Investment

In the early section, we saw how you can create wealth by investing for the long term. In the long term, when you give time for your money to grow, it benefits from the power of compounding. In compounding, you invest an initial amount. The return earned is reinvested, and now you earn returns on the initial amount plus the return reinvested. For example, you invest Rs. 100 in a business. You earn a return of Rs. 15, which you reinvest in the business. Now, you earn returns on Rs. 115.

In the same manner, compounding works in companies in which your mutual fund has invested your money. When a company reinvests its profits in the business, it earns profits on the initial capital plus the profits reinvested. When the cycle keeps repeating year after year, as the annual profits grow, the company share price also grows. As the share prices and market capitalisation of companies in your mutual fund portfolio grows, the scheme’s net asset value (NAV) will also grow. As the NAV of your mutual fund schemes grows, the value of your overall portfolio will grow. Thus, you can create wealth with the power of compounding in the long run.

In an SIP, when you invest regularly every month, in the long run, every instalment will benefit from the power of compounding. Also, if you opt for a step-up SIP, you can increase the monthly SIP amount on an annual basis. A step-up SIP can create more wealth and at a faster rate than a regular SIP.

SIP for Consistency and Discipline in Wealth Creation

In the earlier section, we saw how the Nifty 50 Index has created wealth for investors in the long term. However, the market experiences setbacks from time to time and corrects. In its 29-year journey, the Nifty 50 Index has seen several setbacks. Some of these include:

•  Asian financial crisis
• US sanctions due to nuclear tests
• Kargil war
• Dot com bubble burst
• Subprime crisis
• European debt crisis
• Demonetisation
• Covid pandemic
• Russia-Ukraine war
• Hamas-Isreal war, etc.

However, after every setback, the markets bounced back and went on to make new all-time highs. Consistent and disciplined investors who stayed invested during market corrections through long-term SIP plans have been rewarded handsomely. While the Nifty 50 Index has done well in the long term, the mid and small-cap indices have done even better.

So, investors should always invest regularly through SIP for the long term. They should stay consistent and disciplined with their long-term SIP even when markets run into rough weather. If they do that, once the correction is over, they can sail smoothly during the next phase of the market’s upward journey. Market up and down phases are a part of the long-term wealth creation journey. As a SIP investor, you should stay consistent and disciplined during these phases for long-term wealth creation.

Most Profitable SIP Mutual Funds: Choose the Right One

Many mutual fund schemes have delivered excellent returns for their long-term SIP investors. You can start a long-term mutual fund SIP from as low as Rs. 1,000 per month. With small Rs. 1,000 monthly investments, can SIP make you rich? The answer is a definite yes. Here is an example. A Rs. 1,000 monthly SIP in the Franklin India Prima Fund is worth Rs. 2.1 crore (as of August 2024).

(Source: https://www.moneycontrol.com/news/photos/business/personal-finance/how-sips-rewarded-long-term-mutual-fund-investors-12802532-2.html)

The above chart shows how the fund has grown the investor’s Rs. 3.6 lakhs investment into Rs. 2.1 crores at an XIRR of 21.4% in the last 30 years.

Similarly, other mutual fund schemes have created wealth for their SIP investors. You should work with an investment expert to choose the right mutual fund SIP investment for long term. These are qualified and experienced individuals who can help you with:

• Identifying and quantifying your financial goals
• Making a goal plan for each financial goal
• Recommending the appropriate mutual fund schemes for long-term SIPs to achieve financial goals
• Reviewing the performance of mutual fund schemes regularly and suggesting corrective action whenever required
• Handholding you through the stock market up and down phases till your financial goals are achieved

SIPs: Your Stepping Stone to Create Long-Term Wealth

With mutual fund SIPs, you can invest regularly every month in a disciplined manner. During market downturns, you will accumulate more scheme units at a lower NAV. When the market turns around and starts going up, your entire portfolio will benefit from the rise in NAV. In the long run, your purchase price keeps getting averaged, and you navigate through the various market phases. In a growing economy like India, stock markets have the potential to create wealth for you and fulfil your financial goals. But, with stock markets being volatile in the short term, mutual fund SIPs can be your stepping stone to create wealth in the long run.

FAQs

What is the minimum amount to start a SIP?

Every fund house can decide its minimum SIP amount for various schemes. Most fund houses keep the minimum SIP amount at Rs. 100 to make it affordable to most investors across all income categories.

What should be the SIP tenure?

You should invest in equity mutual funds for the long term. Your investment time horizon will depend on the timeline to achieve the financial goals. A few years before the goal timeline, you should start shifting your money from equities to fixed-income. You can work with an investment expert who can help you with this.