A Major Blunder in the SIP Process
1) SIP means regular investing
2) We keep saying to ourselves SIP Karo Bhool Jao
3) I have always questioned the Bhool Jao mentality
4) Because when you Bhool Jao, you switch off your thinking and that to me isn’t ok
5) Life is all about optimizing
6) The scope of making things better is always there
7) One basic understanding one needs to bear in mind that even though the IRR of SIP may be equal to the CAGR of Lumpsum Investing, the outcome is very different
8) Say you do a Monthly SIP of Rs 100 for 10 years at 10%. You accumulate Rs 20,145
9) When you invest the same total amount (Rs 100 x 12 x 10 = Rs 12000) the outcome is Rs 31,125
10) In 10 years Lumpsum is higher by nearly 55%
11) In 15 years this gap grows to a whopping 87%
12) So understand the difference between SIP and Lumpsum and keep your goal in perspective
13) Yes I do understand that we do SIP because we may not be having the equivalent Lumpsum with us
14) This is because most people fund their investment from their salary income which gets credited into their banks on a monthly basis
15) This is a fair argument but there is a massive blunder in the SIP approach that we over look
16) With passing time, our earning capacity usually increases and does not decrease
17) On the other hand the value of money decreases
18) The Rs 100 that you invest today has a value of Rs 48 in the 15th year at just 5% inflation
19) But clearly after 15 years the investors ability to pay a higher SIP increases
20) If he could pay Rs 100 15 years ago and assuming increment of 10%, his ability to invest in the 15th year actually should be Rs 418
21) So despite having ability to enhance SIP investing the SIP Karo Bhool Jao culture is preventing him or her from enhancing their SIP year on year
22) So while Inflation is eroding his buying power, the investor continues to invest the same amount month after month despite the fact that his increment is likely to be twice the % of inflation
23) Therefore SIP should minimum track the inflation and today’s Rs 100 should be Rs 105 next year and so should keep increasing by the rate of inflation
24) Yes, there is a likelihood that the final Value of Accumulated Wealth may be more than what the Goal requires
25) In this case, you may enhance the quality of Goal at that point in time or simply tranfer the excess fund into your retirement or financial freedom account
26) Alternately, a lot of people who are not in a position to fund the SIP amount in the beginning may start with a smaller affordable amount in the beginning and still attain the goal by gradually increasing the SIP value in keeping with inflation
27) In either ways the right method is to adopt the incremental SIP investing method that should be in tune with inflation
28) This is relevant strategy because people usually start their SIPs when they are young and have ample time to reach their stated Goals
I rest my case
