Systematic Investment Plan – as the name suggests – is made for the long term. It is a popular financial tool for everyday investors to achieve their long-term goals like buying a house, children education and retirement. In this post, we look at how SIPs can support these goals. We also understand how to calculate the SIP amount you need to put aside and my list of best SIP for long term investing.
People have dreams but don’t have goals. People dream of buying a house, buying an expensive car, travelling abroad etc. Dreams become goals when you have a plan & strategy on how you can get there
Let’s take an example.
“Travelling abroad” goal requires you to have a clear idea of your destination (let’s say Bangkok, Thailand), your budget (₹50,000), number of days (7), month of travel (June 2021) etc.
Since June 2021 is still 28 months away, you can start a mutual fund SIP and label it the “Bangkok Trip Goal”. Any financial planner will advice you to put this money in a non-equity fund. A non-equity fund is one where the equity component is less than 30%. One can expect to earn 8% annual returns.
Now we have everything we need to calculate how much money you need to keep aside in a mutual fund SIP for this Bangkok trip.
- Target amount = ₹50,000
- Number of months = 28
- Annual return on investment = 8%
How to calculate the monthly SIP amount on MS Excel?
The amount of money you need to invest in an SIP can be calculated in MS Excel using the PMT function.
The PMT function requires five inputs –
1. Rate means the rate of Interest per period. In the above example, the annual return is 8% however the investment is being done on a monthly basis so we will use 8%/12 in the input field.
2. Nper is the total number of payments. In our case, it is 28 payments towards the SIP.
3. Pv is the present value i.e. the current worth of the total amount of a series of future payments. The prevent value of the SIP today is 0.
4. Fv is the future value or the target corpus which is 50,000 in our case
5. Type is a logical value where payment at the beginning of the period is to be tagged as 1 and payment at the end of the period is 0. In our example, Type = 1.
The formula reveals that one needs to invest ₹1,619 every month for the next 28 months to have a final corpus of ₹50,000. That’s your target amount for that trip to Bangkok you so dearly want to take.
Thus, you would have invested a total of ₹45,332 and then compounding and time would have done it’s magic to take this number to the targeted ₹50,000.
Nice! Bon voyage.
Importance of Equities in Long Term Investing
Since a PLAN is important for achieving your goals and objectives, nothing fits the bill better than Systematic Investment PLANs.
Equity markets have delivered upwards of 14% in the last 30 years. This makes them an ideal instrument for long-term wealth creation. Equities have delivered far better returns than most other financial instruments like real estate, fixed deposits, public provident fund (PPF), savings accounts etc.
There are some instruments like venture capital which deliver better returns but then it comes with a tremendous amount of uncertainty. Plus there is not enough years of data to give us a complete view as angel investing and venture capital have become more mainstream in the last decade or so. Further, there are some restrictions here like being able to bring in a minimum amount of capital, generally upwards of $100,000 or ₹70,00,000.
It is important to start early in the wealth creation journey to reap the maximum benefits.
However, I always believe that there is no expiration date as to from when one can start creating long-term goals or setting up systems in place to achieving those.
All financial planners lay added emphasis on starting an SIP early because it gives your money more time to grow thanks to the power of compounding.
Beginners often make silly investing mistakes while operating through mutual funds and SIPs. It is important that you do good reading or consult an advisor to ensure your learning curve improves.
It is not really about identifying the best SIP for long term. It is more about SIP being the best for long term wealth building.
The Power of Compounding
Compounding means you earn interest on the interest on the interest on the interest of the principal.
Over the moderate to long term, this interest gets accumulated. The higher the tenure (term), the more will be interest accumulation.
Here is how compounding works.
Let’s assume you are starting with ₹10,000 and putting it in an asset that will fetch you 10% annual returns. Here is how your accumulation will look over the next 10 years.
- Year 0 : ₹10,000 (principal)
- Year 1 : ₹11,000 (i.e. ₹10,000 principal + 10% interest i.e. ₹1,000)
- Now, Year 2 : ₹12,100 (i.e. additional 10% on ₹11,000 i.e. ₹1,100)
- Year 3 : ₹13,310 (additional 10% on ₹12,100 i.e. ₹1,210)
- Year 4 : ₹14,641
- Let’s see Year 5 : ₹16,105
- Year 6 : ₹17,716
- Year 7 : ₹19,487
- OK, Year 8 : ₹21,436
- Year 9 : ₹23,579
- Year 10 : ₹25,937
Notice that in year 8, the interest element was higher than the original principal. The interest accumulated in year 8 is ₹11,436 while the principal from year 1 was only ₹10,000.
Another interesting observation here pertains to year 7.
Notice that year 7 is when you are likely to double your money at the 10% annual growth rate (interest). More precisely, it is 7.2 years. This is what is commonly referred to as the Rule of 72
The Rule of 72
The Rule of 72 says that if you divide the interest rate by 72, you will get an almost precise estimate of how many years it will take to double your money. So, if you take different interest rates, here’s how much time you’ll take to double your money –
- 4% : 18 years
- 5% : 14.4 years
- 6% : 12 years
- 7% : 10.3 years
- 8% : 9 years
- 9% : 8 years
- 10% : 7.2 years
- 11% : 6.5 years
- 12% : 6 years
- 13% : 5.5 years
- 14% : 5.1 years
- 15% : 4.8 years
People who start investing at a young age really play the compounding game well.
Assuming a 12% annual growth rate in equities, here is what you can expect to have in your corpus at the age of 65 years if you start by investing ₹1,00,000 at –
- 25 years : ₹93 lacs (your money has grown by more than 93 times)
- 35 years : ₹30 lacs (your money has grown by 30 times)
- 45 years : ₹9.6 lacs
- 55 years : ₹3.1 lacs
Can SIP make you rich?
Yes, SIP can help a person become rich and lead a very comfortable lifestyle. The real question is – what is your definition of rich? This is certainly subject to one’s opinion but reaching a crore rupees i.e. (₹10 million) makes users feel more confident of their finances.
How to earn ₹1 crore?
Equity SIPs will be a useful tool to reach that goal. Here is how long it will take you if you put aside money on a regular basis every month.
- ₹5,000 per month – 26 years
- ₹10,000 per month – 20 years
- ₹20,000 per month – 15 years
- ₹40,000 per month – 9 years
In the above illustration, I used a 12% annual return on the equity investments. It’s on the conservative side but it is the number at which I do my long-term planning calculations. However, if the calculations were done closer to current equity growth rate of 14%, the time to earn a crore gets a bit shortened (remember, the power of compounding is at work here) although not by much.
- ₹5,000 per month – 24 years
- ₹10,000 per month – 19 years
- ₹20,000 per month – 14 years
- ₹40,000 per month – 9 years
Stick to one number. In my opinion, 12% annual growth rate of equities over the long run will serve you just fine.
Try multiple scenarios
Further, our illustration is not without some flawed assumptions which can be tweaked to your advantage. For example – we have assumed that you invest a constant amount of money each month. We also know that you have the ability to increase this amount by 10% each year on account of a 10% increase in income (salary) every year. If we do this, that 1 crore target looks so much nearer and doable. This technique is called step up SIP
Here’s what it will take you –
- ₹5,000 per month with 10% increase each year – 20 years
- ₹10,000 per month with 10% increase each year – 16 years
- ₹20,000 per month with 10% increase each year – 12 years
- ₹40,000 per month with 10% increase each year – 8 years, 7 months
It is highly recommended for all individuals to put some money into an SIP in the beginning of the month and allow the money to grow. In a few years, as we see in the illustrations above, your some money would have grown to a bit pot of wealth.
Best SIP for long term for Investment in 2020
I am proposing five schemes which are apt for long-term investing using the SIP (Systematic Investment Plan) route. The best SIP for long term to invest in 2020 are –
- Axis Bluechip Fund – Direct Plan
- Franklin India Prima Fund – Direct Plan
- Invesco India Contra Fund – Direct Plan
- ICICI Prudential Nifty Next 50 Index Fund – Direct Plan
- SBI Small Cap Fund – Direct Plan
For more details on each of the plans with a focus on why these fund schemes come within the “best mutual fund SIPs to invest” tag, do click on each of the links above for greater details on my assessment
Additional Resources You Might Like
Here are some articles you might like:
- Rakesh Jhunjhunwala and his secrets to investing (Part 1)
- Complete SIP Investment Guide (over 8000 words compedium updated until 2020)
- The trillion dollar index fund story that John Bogle started in the 1970s
- Best SIP for achieving long term goals
- 5 steps on choosing the right term insurance plan for yourself