Yeh Diwali, 10 Rupee Wali

5paisa Research Team 5paisa Research Team 16th March 2023 - 05:37 pm

Throughout history, Diwali has been considered as an auspicious event to start-off on any new journey, spiritual, financial, or otherwise. Be it a new asset purchase, a new business venture, the diversification of an existing business, or even making new investments, Diwali is considered to be the right time to take any such steps.

Regardless, many investors, quite often, tend to hold back their investment plans for various reasons. These plans are held back either because you don’t have the funds or you want to wait for a bigger inflow. This is not a healthy way to achieve financial freedom. Let this Diwali be different. Take a pledge that no matter how small your contribution at first, you will start your investment journey this Diwali without fail.

Here are a few basic things to remember before you start on this life-changing journey.

Starting small is OK because starting is more important

You must have heard of the famous poem, “Little drops of water, little grains of sand, make the mighty ocean, and this pleasant land”. That is exactly the principle that refutes critics of starting small. Remember, even if you start investing in a small way, you will still do better than not starting at all. In mutual fund parlance, this form of investment is called a systematic investment plan or SIP. You invest a small amount (as little as Rs500) at designated intervals (biweekly, quarterly, monthly), which, given enough time, grows into a formidable corpus. Consider the table below:

Particulars	SIP of Rs1,000 (Monthly)	SIP of Rs2,000 (Monthly)	SIP of Rs3,000 (Monthly)	SIP of Rs5,000 (Monthly)
SIP tenure	25 years	25 years	25 years	25 years
CAGR Returns	15%	15%	15%	15%
Total investment	Rs3.00 lakh	Rs6.00 lakh	Rs9 lakh	Rs15 lakh
Investment Corpus	Rs32.84 lakh	Rs65.68 lakh	Rs98.52 lakh	Rs164 lakh
Wealth Ratio	10.9x	10.9x	10.9x	10.9x

If you thought that Rs1,000 per month is a small amount to invest, then you can see right here that it could grow to Rs32.84 lakh in a span of 25 years, nearly 11 times the investment. The wealth ratio does not change irrespective of the amount.

So, the most important thing to do is to start investing and quickly so. Effectively, if you just save Rs35/day, you can reach a target of Rs33 lakh in 25 years. That is surely not asking for too much?

Start the SIP early, the earlier the better

Time makes a huge difference to the eventual corpus that you will accumulate from a mutual fund. In the long run, it is always time that matters more than timing. The earlier you start, the more your investment earns and the more returns it will generate. This is called the power of compounding and it has a multiplier effect in the long run and is the reason why SIP investing appears to work wonders over longer durations.

Let us look at another tabular illustration below:

Particulars	SIP (25 years)	SIP (20 years)	SIP (15 years)	SIP (10 years)
Monthly SIP	Rs1,000	Rs2,000	Rs3,000	Rs5,000
CAGR Returns	15%	15%	15%	15%
Total Investment	Rs3.00 lakh	Rs4.80 lakh	Rs5.40 lakh	Rs6.00 lakh
Investment Corpus	Rs32.84 lakh	Rs30.32 lakh	Rs20.31 lakh	Rs13.93 lakh
Wealth Ratio	10.95x	6.32x	3.76x	2.32x

That sounds a little anomalous, right? You increase your monthly SIP and your total corpus but you accumulate a lower corpus and a much lower wealth ratio. That is because of the time value in a mutual fund SIP.

As you shorten your tenure, your wealth ratio is also sharply lowered. That is because you are not allowing your money to work hard although your investment is higher. So, even if it is as low as Rs35 per day, the idea is to start now.

So, should you start with an SIP in equity funds or direct equity?

This is a standard question you may have in mind. Should you start with an SIP in mutual funds or should you rather start an SIP in direct equities?

When you plan to accumulate a particular stock, doing so in a phased manner is surely a good idea. However, there are two things you need to remember. First, the choice of stock is yours and the risk of your holding is proportionate to the performance of that stock. Hence, you don’t get the benefit of diversification as in the case of an equity fund SIP. Second, a stock SIP requires regular monitoring as you do not have the luxury of a fund manager taking care of the diversification and risk management aspects. Hence, if you are looking to create a long-term corpus, then a mutual fund SIP is a better choice for you.

The bottom line is that you should not spend too much time thinking about starting your regular investments. It does not matter even if your starting corpus is small to begin with. Just start somewhere and the power of compounding, over time, will ensure that it will grow into a meaningful and substantial sum.