Investing in 2024: Why you should continue to prefer SIP mode of investing

2023 was the year of new peaks and achievements. Some of the new peaks and achievements broke conventions and estimates. They prove yet again that forces in the markets respond and react to events and developments in their peculiar manner. As opposed to the not-so-bullish view in 2022, the markets achieved a new peak in 2023. The bull market in the Indian equities- especially the mid and small-cap stocks in 2023—was so pronounced that many experts and analysts had to take notice of it.

But a key development that almost grabbed the attention of the street has been the huge acceptance of the Systematic Investment Plan (SIP) mode of investing. This is reflected in the inflows through SIP mode, which reached Rs 17,073 crore in November 2023 from Rs 13,306 crore in November 2022. This amounts to a growth of 28% on a year-on-year comparison. A noteworthy development contains an interesting story.

Systematic Investment Plans (SIPs) in equity funds are primarily used by individual investors who plan to invest regularly. Statistics give a clear picture of the popularity of SIPs. The monthly SIP contribution recorded for November 2023 was at Rs 17,023 crore compared to Rs 11,005 crore two years ago. This money was routed through 7.44 crore SIP accounts as of November 2023 compared to 4.78 crore on November 2021. A substantial part of the money invested through SIP goes into equity schemes or hybrid schemes with relatively higher allocation to stocks.

Many investors prefer the SIP mode of investing because it is simple to understand and execute. An investor can allocate money according to his capacity. One can start a monthly SIP with a small amount, say Rs 100 per month. The big advantage for an investor is it helps to minimise the negative impact of volatility. For retail investors it may be unnerving to invest in equity funds all their money at one go and then watch the markets oscillate. Instead, SIP puts them at an advantage by helping them buy more when chips are down. Corrections are inevitable in the stock markets. Most investors cannot avoid them. This does not mean one should not invest in stocks fearing corrections. The biggest risk for an investor in a bull market is not investing in stocks. Mutual funds offer a diversified portfolio of carefully-selected stocks. And in this approach, SIP mode of investing makes an investing journey in equities not-so-emotionally taxing.

Over a long period of time, SIPs can create wealth for investors as stock markets keep achieving new peaks with the rise in corporate earnings. Investors have to consider this aspect. Many subscribe to the idea that SIPs work. But they do not increase their contribution to SIP. As one grows older in life, financial goals also change. This calls for revising one’s SIP amount. SIP amount too should be increased every year and one should allow the money to compound in the long-term.

Formula for computing amount after compound interest🡺 A= P*(1+i)^n, — has three key variables. These include principal (or investment), rate of interest (or rate of return) and the time period on hand. Most individuals are aware of this wealth creation formula. However, they focus on maximising rate of return, which is not in their control. Instead, if they focus on investing as much as possible and let it compound for the long-term, they stand a fair chance of building a large corpus. These two are within the control of an investor.

Historically, compounding has been the single biggest factor in the process of sustainable wealth creation.Hence, as we enter 2024, do not undermine the power of SIP in creating wealth in the long-term. If I have to pinpoint one powerful investment idea that should help investors grow rich, then I select SIP. This is because one should focus more on what is in one’s control. Largely, the markets reward investors who invest for the long-term. And SIP is one such powerful tool at the disposal of investors which can do wonders.