How to Invest Money Saving in SIP: Best Mutual Fund for Beginners

Investing is a powerful tool that can transform your financial future, and when it comes to long-term wealth creation, nothing compares to the systematic investment plan (SIP) approach in mutual funds. For beginners, especially those who are just stepping into the professional world, understanding and utilizing SIPs can be a game-changer. This article will guide you through the process of investing in SIPs, highlighting why it’s crucial for young professionals, the importance of mutual funds, and how compounding can lead to significant wealth over time. We’ll also explore the long-term benefits, the impact of market fluctuations, and the immense potential of small-cap funds.

#1. SIPs: A Must for Young Professionals and Entrepreneurs

If you’re starting your first job, earning your first salary, or launching a startup, investing in a systematic investment plan (SIP) is one of the smartest decisions you can make. Why? Because this is the time when you have the greatest advantage: time. The earlier you start investing, the more time your money has to grow.

First Job and First Salary: When you start earning, it’s tempting to spend your entire paycheck on immediate gratification. However, setting aside a portion of your salary for SIPs ensures that you’re not just earning but also growing your money. SIPs offer a disciplined approach to investing, where a fixed amount is invested regularly, regardless of market conditions. This disciplined approach helps in building a substantial corpus over time.

Startup Ventures: For entrepreneurs, SIPs offer a reliable way to create a financial cushion. Startups come with their share of uncertainties, and having a SIP investment ensures that you’re building wealth on the side, regardless of your business’s performance. Moreover, SIPs are flexible; you can start with a small amount and increase it as your income grows.

Understanding Compounding: One of the most powerful concepts in investing is compounding—earning returns on your returns. When you start early, the compounding effect works in your favor, allowing even small investments to grow exponentially over time. For instance, investing in your 20s can significantly increase your wealth by the time you retire, thanks to the power of compounding.

#2. Two Important Things About Mutual Funds

When considering mutual funds, especially SIPs, it’s crucial to understand two key aspects:

Diversification: Mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. This diversification helps mitigate risk, as the performance of a single investment doesn’t significantly impact your overall portfolio. For beginners, this is an ideal way to start investing because it spreads the risk and offers exposure to multiple assets.

Professional Management: Mutual funds are managed by professional fund managers who have the expertise and resources to analyze markets and make informed investment decisions. This professional management is beneficial for beginners who may not have the time or knowledge to manage their investments actively.

#3. How to Invest in Your 20s

Your 20s are the ideal time to start investing. At this stage, you have fewer financial responsibilities, and your income is likely to grow over time. Starting early allows you to take advantage of compounding and to invest in higher-risk, higher-return options like equity mutual funds.

I’ve created a detailed video on how to invest in your 20s, which you can watch on my YouTube channel. The video breaks down the steps you need to take, the types of mutual funds you should consider, and how much you should aim to invest each month to meet your long-term goals.

#4. Long-Term Investments Make You Rich

When it comes to building wealth, long-term investments are your best bet. SIPs, by their very nature, are designed for long-term wealth creation. By consistently investing over a long period, you benefit from market upswings, the power of compounding, and the averaging of market volatility.

For instance, if you start investing Rs. 4,000 per month in a SIP with an assumed return of 17%, over a period of 30 years, you could accumulate a wealth equivalent to Rs. 4,50,30,656. This kind of wealth creation is possible because of the consistent, disciplined approach of SIPs, coupled with the compounding effect over a long time.

#5. The Rs. 4,50,30,656 Wealth Creation Formula

Let’s break down the math. If you invest Rs. 4,000 every month for 30 years at an assumed return rate of 17%, you could potentially accumulate Rs. 4,50,30,656. How is this possible?

The key here is the high return rate, which, though optimistic, is not unattainable. Historically, the Sensex has delivered an average return of 17.6% since its inception in 1979. By staying invested over a long period, you can take advantage of market growth, and this consistent growth, combined with compounding, can result in significant wealth accumulation.

However, it’s important to remember that past performance is not indicative of future results. While the market has delivered strong returns in the past, it’s essential to have realistic expectations and be prepared for market fluctuations.

#6. The Importance of Staying Invested for the Long Term

Many investors make the mistake of withdrawing their investments during market downturns. However, the key to successful investing, especially in SIPs, is to stay invested for the long term. Markets are cyclical, and what goes down will eventually come up. By pulling out during a downturn, you not only realize losses but also miss out on potential market recoveries.

Consider this: if you stay invested in a SIP for five years, even through market downturns, you’re likely to see significant returns. This is because SIPs work on the principle of rupee cost averaging, where you buy more units when prices are low and fewer when prices are high, thus averaging out the cost over time.

#7. The 5-Year Illustration

To illustrate the importance of staying invested, let’s look at an example. Suppose you start a SIP of Rs. 10,000 per month. After five years, even if the market goes through ups and downs, your investment would have grown significantly. This is because SIPs capitalize on market volatility, allowing you to accumulate more units during downturns, which in turn leads to higher returns when the market recovers.

The 5-Year Illustration: The Power of Compounding in SIPs

To truly understand the impact of compounding in SIPs, let’s delve into a practical illustration over a five-year period. This example demonstrates how consistent investing and the power of compounding can significantly grow your wealth, even within a relatively short timeframe.

Imagine you start a SIP with an initial investment of Rs. 10,000 per month. You choose a mutual fund that provides an annual return of 15%, which is a reasonable and achievable return in many equity mutual funds over the long term.

Scenario 1: Consistent Investment Without Step-Up

In the first scenario, you invest Rs. 10,000 every month for five years without increasing your investment amount. Here’s how the numbers break down:

• Monthly SIP Amount: Rs. 10,000
• Annual Return Rate: 15%
• Investment Period: 5 years

Using the formula for calculating the future value of a SIP investment:

Future Value=P×((1+r)n−1r)×(1+r)\text{Future Value} = P \times \left(\frac{(1 + r)^n – 1}{r}\right) \times (1 + r)Future Value=P×(r(1+r)n−1​)×(1+r)

Where:

• PPP is the monthly investment amount (Rs. 10,000),
• rrr is the monthly interest rate (15% annual rate divided by 12 months = 1.25% or 0.0125),
• nnn is the number of months (5 years = 60 months).

Plugging in the values:

Future Value=10,000×((1+0.0125)60−10.0125)×(1+0.0125)\text{Future Value} = 10,000 \times \left(\frac{(1 + 0.0125)^{60} – 1}{0.0125}\right) \times (1 + 0.0125)Future Value=10,000×(0.0125(1+0.0125)60−1​)×(1+0.0125)

Future Value=10,000×((1.0125)60−10.0125)×1.0125\text{Future Value} = 10,000 \times \left(\frac{(1.0125)^{60} – 1}{0.0125}\right) \times 1.0125Future Value=10,000×(0.0125(1.0125)60−1​)×1.0125

Future Value≈Rs.8,96,816\text{Future Value} \approx Rs. 8,96,816Future Value≈Rs.8,96,816

So, after five years, your investment would grow to approximately Rs. 8,96,816.

Scenario 2: Step-Up Investment with 10% Increase Each Year

Now, let’s consider a scenario where you increase your SIP contribution by 10% every year. This approach is known as the step-up SIP, and it allows your investment to grow at a faster rate, taking advantage of your increasing income over time.

• Year 1 SIP Amount: Rs. 10,000 per month
• Year 2 SIP Amount: Rs. 11,000 per month (10% increase)
• Year 3 SIP Amount: Rs. 12,100 per month (10% increase)
• Year 4 SIP Amount: Rs. 13,310 per month (10% increase)
• Year 5 SIP Amount: Rs. 14,641 per month (10% increase)
• Annual Return Rate: 15%
• Investment Period: 5 years

In this step-up scenario, the future value calculation becomes a bit more complex, as each year’s investment amount is different. However, after calculating the compounded future value with each year’s increasing investment, the final amount would be:

Future Value≈Rs.10,38,529\text{Future Value} \approx Rs. 10,38,529Future Value≈Rs.10,38,529

This means that by simply increasing your SIP contribution by 10% each year, your investment would grow to approximately Rs. 10,38,529 after five years, assuming the same 15% annual return.

Conclusion of the 5-Year Illustration

This illustration clearly shows the power of compounding and the additional benefit of stepping up your SIP contribution each year. In just five years, you can significantly enhance your wealth creation potential by staying consistent and gradually increasing your investment. The difference between the two scenarios—Rs. 8,96,816 without step-up and Rs. 10,38,529 with step-up—highlights how even small increases in your SIP amount can lead to substantial gains over time.

By understanding and leveraging these principles, you can make your money work harder for you, achieving your financial goals faster and more efficiently.

#8. Never Stop Your SIP

One of the golden rules of SIP investing is to never stop your SIP, regardless of market conditions. It’s easy to get nervous during market downturns and consider halting your SIP. However, this is the worst mistake you can make. SIPs are designed to work best when they are consistent and uninterrupted.

Stopping your SIP during a market crash means missing out on the opportunity to buy more units at a lower price, which could significantly affect your long-term returns. The market is unpredictable, but by staying the course, you allow your investments to recover and grow over time.

Also read: How to Maximize Your Wealth: A Comprehensive Guide to Systematic Investment Plans (SIP) with Increasing Amounts Yearly

#9. Don’t Worry About Market Crashes

Market crashes are inevitable, but they are not the end of your investment journey. In fact, for SIP investors, market crashes can be a blessing in disguise. During a crash, the value of your SIP might decrease, but this is also when you’re purchasing more units at a lower price. Over time, as the market recovers, these units will increase in value, leading to higher returns.

It’s essential to maintain a long-term perspective and not panic during market downturns. Remember, the stock market has always recovered from crashes, and those who stay invested during these times are the ones who reap the rewards.

#10. The Power of Compounding in SIPs

Compounding is the process where the returns on your investments generate additional returns. In SIPs, compounding works its magic over time. The longer you stay invested, the more your money grows. This is because you’re not only earning returns on your initial investment but also on the returns generated.

For instance, if you start investing Rs. 10,000 per month in a SIP at an assumed return rate of 17%, and continue this for 30 years, the power of compounding will lead to exponential growth in your investment, far beyond the total amount you have invested.

#11. Small-Cap Funds: High Risk, High Reward

For those willing to take on a bit more risk, small-cap funds can offer higher returns. Small-cap funds invest in smaller companies with high growth potential. While these funds are more volatile and riskier than large-cap or mid-cap funds, they also have the potential for higher returns.

Historically, small-cap funds have delivered a compound annual growth rate (CAGR) of 18%-20%+. There are currently 49 funds in this category, and many have doubled investors’ money in just 3.5 years, with some delivering returns of 20%-25% or more. If you invest Rs. 10,000 per month in a small-cap fund with an assumed CAGR of 22%, over a period of 10 years, you could accumulate Rs. 43,58,642. If you increase your investment by 10% per year, this could grow to Rs. 57,86,165.

#12. Increase Your SIP as Your Income Grows

As your income increases, it’s wise to increase your SIP contributions. This ensures that your investments keep pace with inflation and your growing financial goals. Even a small annual increase in your SIP amount can lead to significantly higher returns over time.

For instance, if you start with a SIP of Rs. 10,000 per month and increase this by 10% each year, your investment could grow substantially more than if you had kept your contributions the same throughout the investment period.

#13. Why I’m Not Naming Specific Funds

You might be wondering why I’m not recommending specific mutual funds. The reason is simple: mutual fund performances vary, and the best funds today might not be the best tomorrow. It’s crucial to review and select funds based on current market conditions, your financial goals, and your risk tolerance.

I regularly review and update the funds I recommend to my clients, and I advise you to do the same or consult a financial advisor who can provide personalized recommendations. Be wary of blindly following recommendations from YouTube or other platforms without doing your own research. The right fund for you depends on many factors, including your investment horizon, risk appetite, and financial goals.

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Conclusion

Investing in SIPs is one of the most effective ways to build long-term wealth. Whether you’re just starting your career or looking to create a financial cushion, SIPs offer a disciplined, flexible, and powerful investment strategy. By starting early, staying invested, and taking advantage of the power of compounding, you can achieve significant financial growth over time.

Remember, the key to successful SIP investing is consistency. Never stop your SIP, don’t panic during market downturns, and consider increasing your investment as your income grows. And while small-cap funds can offer high returns, they also come with higher risks, so make sure your investments align with your financial goals and risk tolerance.

If you’re ready to start your SIP journey, or if you need help selecting the right funds, feel free to reach out for personalized advice. Your future self will thank you for the decisions you make today.