SIPs- The Safest Way To Increase Your Net Worth. SIP vs Lumpsum!

Investing a certain amount on a fixed date every month is termed as SIP. Ever wondered how do they work? How is it the safest way to increase your net worth? Let's learn all in this article.

You must have heard this from your elders a thousand times at least that the most important thing that one needs to attain success is discipline. Our scriptures preach the same thing so do our academics. I say the same applies to the journey of increasing your wealth as well and SIP or Systematic Investment Plan is the best way to make the investment journey a disciplined one.

How does SIP work?

Let's first start with deciding a date and every month you invest a fixed amount in a particular asset, be it mutual funds or crypto or whatever, regardless of the market conditions for a long period of time ( more than 5 years).

Many may ask the question that why to invest regardless of the market condition and not wait for the market to come down a bit so that when we invest when the prices are low, we can make more returns from our investment. The question is pretty rational but this mindset is something that is not meant for a novice investor. This particular argument is very valid for seasoned investors like Rakesh Jhunjhunwala or RK Damani or Vijay Kedia but when comes to people who have a lot of things to do, have jobs or studies, not enough time and skills to study the market conditions. You make a wrong analysis of market conditions and all your returns turn negative. Hence, SIP, in my opinion, is the safest way to increase the net worth.

Let me explain this by giving a real-life example. Assume that we are doing a monthly SIP in ICICI Prudential Technology Fund from 15th Jan 2018 till now. So, we invest ₹100 in this fund on the 15th of every month. This mutual fund mostly invests in tech companies like Infosys, TCS, Wipro, HCL and others. The tech sector has seen many ups and downs since we started investing in 2018. On Jan 14, 2022, i.e. 4 years since we started investing, in total, we have invested ₹4800. Do you know what is the value of our investment? The ₹4800 that we invested is now worth ₹12,576 i.e. 3 times the value of our investment. This roughly translates into 50% returns every year and this is a huge number and that's the reward of our discipline. We did not put a single effort to study the market. What we did was choose a random date and keep investing in that particular date every month for a long time.

Investment vs Current Value

I have used the data from MoneyControl. You should check their page if you are interested in more such stuff. And the fund mentioned here is purely random and in no way am I recommending you to invest in it. Choose the funds that you want to invest in as per your risk profile or you can read my article on how to choose which mutual fund is best for you by clicking the link below.

Which Mutual Fund Should You Invest In?

When should you do lumpsum investment?

Lumpsum investment means that instead of investing in fixed regular intervals. you invest the entire amount in one go. If we take our previous example, if you have opted for lumpsum investment, you would have invested the entire ₹4800 at one time and not ₹100 every month for the next 4 years. This is also known as a one-time investment.

This does have the potential to yield better results than the SIP model provided you have enough knowledge to know when is the best time to invest in. If you pick up a wrong time, your entire investment might go down for years to come or in some cases, might just never recover.

You might ask me what should be done if you have a huge sum of money available to you at a particular time? Yes, it's true that holding money in your bank account gets slowly destroyed due to inflation. If you don know how inflation eats away your savings, do read my article on it linked below.

I WISH I KNEW THIS IN MY FIRST YEAR OF COLLEGE

Let me tell you how can you get out of this situation. In this situation, I will recommend you to put that amount in a debt mutual fund. It is something that provides you with almost no risk-return and it is usually just enough to beat inflation. For example, you received ₹5000 from your parents or as a bonus from your internship or some cash reward or something else. You put that entire amount in a debt mutual fund. Now, you also have a SIP running where you invest ₹100 every month in an equity mutual fund. So, what you do know is that every month, you withdraw ₹500 from the debt mutual fund and instead of investing ₹100 as the SIP, you invest ₹600 till the entire ₹5000 has not been withdrawn and once you are finished with the surplus cash, you dial down to your old ₹100 SIP.

This way you are making sure that you are not taking any unnecessary risk and this plan is the best for any college student or anyone who has recently started his/her investment journey.

I personally use "Groww" to invest in mutual funds, track them and so far I do not have any complaints against them. They make it much easier to do SIPs as if we just need to select the date and the mutual fund and Groww automatically invests for us on that said date. This is not sponsored. However, if you are planning to open an account using Groww and invest in mutual funds, you can use my referral link, through it both of us can get ₹100 deposited in our account when you activate your account on Groww. It is a win-win situation. Click here to open an account on Groww.

SIP is a great way to enjoy healthy returns without taking any major risks or spending your resources to understand and time the market. With this, we have made it to the end of yet another article. I hope you have acquired something new. Consider giving it a like and sharing it among your friends and family. It will motivate me to keep writing new articles for you. To get notified whenever I publish new articles, sign up to the NerdyTree by hitting the "log in" button at the top of the page.

Let me know if you have any queries regarding the same.