Here is a short story to set the context. There was once a tree at the edge of a forest that had deep roots, a thick trunk and wide branches. A lot of birds sat on its branches and passers-by sat under the cool shade that the tree provided to beat the scorching sun. At the foot of the tree there was a small plant that seemed slender and delicate and swayed at the slightest breeze.
The big tree was very proud of its achievements and often mocked the smaller plant. It even advised the small plant to follow in its footsteps and spread its roots wider. To this, the smaller plant smiled and remarked that it was safe just the way it was. The big tree had a hearty laugh at this thinking that the small plant had lost its mind.
But the big tree had spoken too soon. A few days later, a big hurricane struck the forest. The hurricane was so strong that it uprooted the thickest of trees, including the big tree at the edge of the forest. However, the small plant had managed to twist and turn with the strong gushing winds and survive the storm!
The story of the big tree carries a lesson for equity investors. There are many who feel that one needs to invest large sums in equities to create wealth over the long term. But this may not be true. Even smaller sums invested regularly over a stretch of time can help to compound and yield a large corpus.
One can invest as little as Rs.500 per month in equity mutual funds via systematic investment plans or SIPs. By investing regularly via SIPs, one can balance out market risks by buying more mutual fund units when the prices are low and less units when the prices are high. Thus, an SIP of Rs.500 helps you to buy 50 units when the unit price is Rs.10 and 100 units when the unit price is Rs.5. Over a longer period of time, this helps you to average out your cost assuming markets move in both directions. This is also known as ‘Rupee Cost Averaging’.
Besides this, SIPs offer you the power of compounding where small and regular investments can help you generate substantial wealth over the long run. For example, if your goal is to invest for a retirement corpus and you start with a SIP of Rs.5000 per month, the corpus could be Rs.1.77 crore at the end of 30 years (Principal invested Rs.18 lakh) assuming the equity markets grow at a compounded rate of 12% per annum. Many of you may also like to increase your investments year on year, say by 10%. In this case, if your SIP amount is increased by 10% every year, the revised accumulated corpus after 30 years at a compounded rate of 12% per annum would be Rs.4.4 crore. This is 2.5 times more than the earlier corpus.
Similar to the small plant which braved the hurricane, you too can create wealth despite bouts of volatility by choosing the SIP route. The only condition is that you need to be persistent and withstand the negative periods of the market. We therefore say that SIP is like a good EMI – an investment and not an instalment. Just as we are committed to pay our EMI, we should continue our SIPs for longer periods of 10, 20, 30 years and create wealth in the process. So if you believe that small is beautiful, then SIP is the way forward to meet your long term investment goals.
Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its adviser/ tax consultant prior to arriving at any investment decision.
Author: Franklin Templeton Mutual Fund