SIP Investment: Rs 5,000 For 20 Years Or Rs 10,000 For 10 Years — Which One Is Better?
Choosing the right SIP investment should depend on your financial goals, investment horizon and risk appetite.
Systematic investment plan has become a popular option for individuals who want exposure to both equities and debt instruments. The mutual fund SIP plans allow them to invest a fixed amount regularly, helping to accumulate wealth in the long run. The SIP investment is seen as a disciplined approach by the financial experts.
Individuals new to investing often prefer SIPs over stocks because they provide diversification, allowing them to invest without the need for constant monitoring of the markets. This disciplined approach helps investors accumulate wealth over time, benefiting from the power of compounding.
It is generally recommended to have a long-term investment outlook in SIPs to shield wealth from short-term market volatility. However, individuals planning for specific financial goals, such as buying a home, may find it confusing to decide on the duration and investment amount for their SIPs.
In these cases, people may find it challenging to decide if a higher contribution for the short term or a smaller contribution over a longer duration is better.
Assuming a realistic 12% annual return over 10 and 20-year durations, here's how the SIPs help to accumulate wealth:
Scenario 1
SIP amount: Rs 10,000 per month.
Time: 10 years.
Investment amount: Rs 12,00,000.
Returns: Rs 10,40,359.
Maturity Value: Rs 22,40,359.
Scenario 2
SIP amount: Rs 5,000.
Time: 20 years
Investment amount: Rs 12,00,000.
Returns: Rs 33,99,287.
Maturity value: Rs 45,99,287.
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It can be seen that investing Rs 5,000 over 20 years gives significantly higher returns than investing Rs 10,000 over 10 years. This is despite the total investment being the same.
The longer investment horizon offers a higher benefit of compounding. Among the scenarios mentioned above, an investment of Rs 5,000 for 20 years should be your preferred option for long-term wealth accumulation. You are investing the same amount of Rs 12 lakh, but the investment tenure of 20 years helps to generate nearly three times the returns compared to the 10-year tenure.
Hence, it is recommended to start an SIP as early as possible to maximise return potential. Investors may also consider diversifying the amount over large, mid and small cap funds.
However, choosing the right SIP investment should depend on your financial goals, investment horizon and risk appetite. You can also take the help of an SIP calculator or a financial advisor to estimate the returns and how much you should invest every month to meet the target.
