How to achieve financial goals faster with step-up SIPs this new year?

Many investors look forward to planning their new year with either new investments or upscaling those existing in their investment portfolios. Novelty is the factor that catches most new investors off guard though not all investments may not serve your purpose. This underlines the need to continue existing investments like mutual funds or topping them up regularly to earn higher returns while beating the impact of inflation in the long run.

Recognizing the significance of compounding is essential to grasp the role mutual fund investments play in achieving your wealth accumulation objectives. Compounding is the process wherein the returns on your investments generate further returns over time, leading to a compounded growth of your investment portfolio. This compounding phenomenon is particularly powerful in mutual funds, as returns are automatically reinvested, fostering compounding on both your initial investment and the accrued returns.

To exemplify the impact of compounding, let’s examine the following scenario. 

Imagine allocating ₹10,000 every month to a mutual fund with an anticipated annual return of 12 per cent. The investment when continued for 10 years would yield the following results.

Invested Amount: ₹12,00,000

Estimated Returns: ₹11,23,391

Total Value of the Returns: ₹23,23,391

Now examine the following scenario wherein you step up your annual investments by 10 per cent.

Now, the new financial results would be

Invested Amount: ₹19,12,491

Estimated Returns: ₹14,61,835

Total Value of the Returns: ₹33,74,326

The potential of compounding extends beyond substantial investments. Even modest, regular contributions can amass significant wealth over time. This explains how you can still amass ₹10 lakh in 30 years even with small, monthly investments of ₹10,000 in a fund that yields a decent 10 per cent return every year. 

Increased investments mean that you hit your target within a few years instead of having to wait for 20-30 years, unlike most investors. For example, allocating a higher amount, such as ₹1 lakh per month, to mutual funds can markedly expedite your journey to wealth accumulation. By consistently investing a substantial sum, you can harness the compounding effect more efficiently, enabling your investments to experience accelerated growth.

Individuals who commit to larger and progressively growing investments often encounter swifter wealth expansion. This is attributable to the heightened impact of compounding, wherein a larger investment base leads to more pronounced returns. Furthermore, the practice of consistently augmenting your investments enables the leverage of compounding on multiple fronts — encompassing returns on the initial investments, returns on the accumulated gains, and returns on the additional investments made over time.

Despite short-term fluctuations in returns caused by market volatility, long-term equity investments have consistently proven their resilience, with the capacity to withstand uncertainties and generate substantial wealth over time.

Historical data illustrates that, even during periods of market downturns, equity markets have consistently shown an upward trajectory in the long run. This enduring trend is largely attributed to the dynamic nature of businesses, showcasing their adaptability and ability to thrive in evolving economic landscapes.

The resilience of equity markets arises from their intrinsic growth potential, fuelled by the expansion and innovation of the companies they represent. This explains why deciding to step up investments this new year and continuing this practice for a prolonged period not only helps investors achieve their financial goals but also amass to leave behind a legacy for their loved ones. 

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Updated: 19 Nov 2023, 10:48 AM IST