3 Ways SIPs That Could Help Achieve Financial Independence

One always wants to understand the cause and effect of events then and there. Else we tend to force fit-cause effect around events. Rather, it is best to reduce the points of decision-making and automate investing decisions via SIPs.

Case for SIPs

If one believes in unimaginable events occurring, not being able to list all risks and provide for the same, then SIP could be a way of wealth building and the same being handy when events strike. SIP also ensures one is taking exposures at various points in time and diversifying risk at a particular point of time.

Waiting or timing the market is not a great option, thus SIP it

One would lose more by waiting in cash while all SIP tranches may earn in an upward linear market in the long run. In the short term, Markets are not linear with peaks and bottoms getting formed in the journey - every week, every month. In the last 30 years, Nifty 50 witnessed temporary declines of more than 10-20% every alternate year and temporary decline of more than 30% once in 8 to 10 years (source: Funds India), yet clocking a CAGR of a little over 13%. As valuations run up and move closer to peak historical valuations, investors may take exposures towards equity markets systematically via Systematic Transfer plans and Systematic investment plans.

Impact of missing 'staying invested' days

In a 29-year study of the period between 1990 to 2019, when the best 10 days were missed staying invested into and thus the miss in corresponding days' returns, the overall CAGR return of the period came down by 3-4% and when best 20 days were missed, the return for the period almost halved. However, it is practically impossible to gauge when the market peaks and bottoms would be formed. Thus it is best to keep adding exposure to equity markets systematically and stay invested and for long periods.

Hack is in Investing for long term

When daily index values of Nifty 50 are taken and average rolling returns are plotted for 1 year, 3 years, 5 years, 7 years and 10 years, the instances of positive returns increased with time periods and instances of negative returns decreased. The instances of negative returns turned Nil when rolling returns were taken for a 7 years period and beyond. This is the benefit of long term investing.

Absolute wealth creation is the key, not just XIRR

It is not about timing the market, it is about time in the market. Total corpus as a multiple of the capital invested becomes higher as you spend more time in the market on account of compounding. In waiting for market bottom to be formed, the investor would lose out on spending 'time in the market'. An investor who starts SIPs earlier, at the prevalent market levels at that point in time, would be able to build higher absolute wealth than the investor who waits for the market bottom to be formed as he spends less time in the market. XIRR return could be lower in this case however it is more about the creation of an absolute wealth corpus.