Learn Why You Should Start Investing in SIPs in Your Early 20s

  • 05 Jun 2024
  • Read 7 mins read

INVESTING IN SIPS IN YOUR EARLY TWENTIES

SIP investments have become the easiest route to long term wealth creation. The best way to realize your long term goals is to set financial goals and then use monthly SIP to reach these goals. A SIP plan is about starting early and sustaining the SIP over a long period. One of the biggest SIP benefits you must be aware of is that eventually it is the power of compounding that takes care of SIP returns.

Of course, you can use SIPs to not only create long term wealth but also deploy tax saving SIPs by structuring a SIP in an ELSS fund. But the most important thing as we shall see about SIPs is the need to start early, hold the discipline and stock to the discipline of allocating money to equities on a consistent basis over the long term. That is the crux of the mutual fund SIP investment

 

Why starting early gives a big advantage to SIPs?

Whey you start early, there are several advantages you get in a SIP. Here is how

a) SIP is about discipline, so the more time you give to yourself, the more time the SIP has to navigate the vagaries of the equity markets.

b) SIP works best when the power of compounding works. The longer you hold the SIP, the more your principal earns returns. The longer your returns are reinvested, the longer these returns earn further returns. It is all about making money work hard.

c) Starting early helps you to keep a time buffer. If you start planning with a 3-4 year buffer, there is only so much that SIPs can help you. On the other hand, if you have 15-20 years for the SIP, there are experiments and course correction that you can do.

d) SIP is not about the rate of return, the quantum of investment or about timing the market. It is about time. The longer you hold the SIP and continue investing, the more likely you are to create extra wealth through the SIP. Over the longer period, you will see that it is all about time and the longer the better.

e) Finally, it is about risk appetite. When you are in your early twenties, your risk appetite is high and hence you can afford to allocate more money to equities. As your age advances, your risk appetite reduces. By starting early, SIP can run equities for longer.

Why starting in your twenties matters

At the end of the day, the proof of the pudding lies in the eating. Here we look at 4 investors who invest in mutual fund SIPs in similar instruments and earn the same annual rate of return. However, while Alpha starts the SIP when is still in his twenties, Theta starts the SIP when he is 40. How does that impact the SIP wealth creation?

ParticularsAlphaBetaGammaTheta
Starts SIP at age of25303540
Stops SIP at age of55555555
CAGR on Equity MF14%14%14%14%
SIP AmountRs.5,000Rs.10,000Rs.15,000Rs.20,000
Total InvestedRs.18 lakhRs.30 lakhRs.36 lakhsRs.36 lakh
Gross Wealth at 55Rs.2.78 croreRs.2.72 croreRs.1.97 croreRs.1.23 crore
Gross Wealth Ratio15.44 times9.07 times5.47 times3.42 times

The table underlines the importance of starting early and staying invested for a longer period. Alpha made the smallest total investment over 30 years, yet created maximum wealth at the age of 55. Contrast that with Theta. He contributed the most amount of money in a shorter period of time, yet created the lowest wealth. That is evident in the gross wealth ratio. What is the secret behind Alpha doing so much better than Theta. The yields are the same and the amount invested is the lowest in case of Alpha. Yet, just because Alpha starts when he is still in his twenties, he gets a huge head start when it comes to creating wealth in the long run. The moral of the story is that if you want the SIP to create wealth your focus must be on starting in your early twenties, , maintaining discipline and focusing on diversified equity funds. Wealth is just the outcome.

The table underlines the importance of starting early and staying invested for a longer period. Alpha made the smallest total investment over 30 years, yet created maximum wealth at the age of 55. Contrast that with Theta. He contributed the most amount of money in a shorter period of time, yet created the lowest wealth. That is evident in the gross wealth ratio. What is the secret behind Alpha doing so much better than Theta. The yields are the same and the amount invested is the lowest in case of Alpha. Yet, just because Alpha starts when he is still in his twenties, he gets a huge head start when it comes to creating wealth in the long run. The moral of the story is that if you want the SIP to create wealth your focus must be on starting in your early twenties, , maintaining discipline and focusing on diversified equity funds. Wealth is just the outcome.