How a delay in starting SIPs can eat into your wealth-creation potential   

Systematic Investment Plans (SIPs) can be an affordable way to invest in mutual funds. They allow investors to regularly invest fixed amounts into a mutual fund scheme. Over time, even small but consistent investments have the potential to build wealth. The key, however, is to start early. 

This article tells you more about how delaying your SIP investment journey can affect your potential gains.

• Table of contents

1. The cost of delayed SIPs
2. Reasons for delay in SIP investments
3. How to avoid SIP delays?
4. What to do if you haven’t started an SIP yet

The cost of delayed SIPs

The compounding effect on investments can potentially result in accelerated growth.

Here’s how compounding works: when you invest money, you earn returns on your initial investment (which is like your principal amount). If these potential returns are reinvested, you go on to earn returns not only on your initial investment but also the reinvested amount. This process – of earning returns on returns – is known as compounding.

The effect of compounding on your investments can pick up speed with time. By delaying SIP contributions, investors miss out on some of the benefits of this accelerated compounding. To make up for this, investors may have to significantly increase their investment amounts to try to achieve the same financial goals.

Reasons for delay in SIP investments

Here are a few reasons why investors may put off their SIP journey:

• Lack of awareness: Some investors may not fully understand the benefits of SIPs or the potential cost of delay. They may assume that investing large sums when they have the capacity to do so may be better than starting early with a smaller instalment.
• Perceived difficulty: Some investors may believe that process of selecting a mutual fund and starting an SIP will be complicated. In reality, there are many resources online to guide you on mutual fund selection. Moreover, mutual fund distributors, wealth planners and financial advisors can help you decide a suitable fund type for your risk appetite and goals. Once you’ve selected your fund, the process of starting an SIP and investing is smooth, seamless and quick. It can be done online or offline. The digital process takes just a few minutes, whereas the offline process may involve some paperwork.
• Fear of investing mistakes: Investors may worry about selecting the wrong mutual fund or SIP amount. A financial advisor can help you determine the right scheme based on your risk appetite, goal, and investment horizon.
• Market volatility: Investors may want to start SIPs when market conditions appear favourable. However, fluctuations are a part of market cycles and prices tend to stabilise over a longer horizon.
• Short-term focus: Investors may prioritise their immediate financial needs over long-term financial planning.

How to avoid SIP delays?

Here are some ways to avoid a delay in making SIP investments:

• Set investment goals and create a financial plan: Define specific and achievable investment goals. Use an sip interest calculator to determine how much you need to invest and when you need to start to potentially achieve these goals.
• Start small: Start with an amount that you can comfortably afford. There are several SIP options starting at Rs 100 to Rs 500, depending on the scheme and mutual fund house. You can start a new SIP with a larger amount when your finances allow that.
• Focus on the long term: Instead of trying to time the market or predict short-term fluctuations, focus on the benefits of consistent investments over time.

What to do if you haven’t started an SIP yet

The earlier you begin investing, the better it is – but it’s never too late to start. If your financial goal is several years away, you can still benefit from long-term compounding.

If you have a shorter horizon, you can opt for a larger instalment size and make lumpsum investments whenever you have surplus funds. You can also consider a step-up SIP, which allows you to increase your instalments by a fixed rate at regular intervals. If you consider this approach, you can use a step up SIP calculator. This free online tool helps you see how gradually increasing your SIP contributions over time can potentially boost your final corpus. Enter your SIP amount, tenure, expected returns and step-up rate. The calculator than estimates the final value of your investment. Do note, however, that the calculator's output is based on your inputs and there is no guarantee that these returns will be achieved.

Conclusion

SIPs offer you the flexibility to invest an amount that you can comfortably afford. With time, even small but disciplined investments can potentially build wealth through the power of compounding. So, if you are considering investing in mutual funds via SIPs, it is recommended that you start as soon as possible. Consult a financial advisor to determine the right scheme and SIP amount for you.

FAQs:

Can delayed SIPs be recovered or compensated for?

It may or may not be possible to entirely compensate for the delay. The precise answer would depend on the SIP amount and duration of delay. However, investors can seek to bridge the gap by increasing the instalment size, making periodic lump sum investments and regularly monitoring their portfolio to optimise return potential.

What are some common reasons for procrastinating in SIP investments?

Many investors may not realise the potential cost of delaying investments. Additionally, they may assume that the process of setting up an SIP complex. They may be unsure how to select the right scheme and SIP amount. They may also seek to invest only when market conditions are favourable.

What is the ideal timeframe for investing in SIPs?

The ideal timeframe for making an SIP investment depends on your financial objectives, time horizon, and risk profile. Equity schemes are typically better suited to long-term investing whereas some debt mutual funds may be better for short-term goals. However, for long-term wealth creation, starting early and investing regularly is recommended.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.