As someone who takes their investments as seriously as their morning cup of tea, the conventional wisdom of SIPs was a comforting mantra. The idea of consistently investing a fixed amount every month and letting compounding work its magic seemed like a reliable approach – at least that’s how monthly SIP is projected in today’s world. You invest few thousands every month in your 20s, 30s, 40s and then over a period of 10 to 20 years, your sum compounds into double, triple, quadruple etc.
Like for instance, we often come across such explanations from fund investors and advisors –
If you invest 50,000 rupees every month in a systematic investment plan (SIP) for 30 years and raise the investment amount by 10% each year, you can reach 100 crore rupees, at an annualized return of 16.5% (which is feasible and possible going by the historical records).
There’s such examples for every type of earner – no matter how low the amount of monthly investment is!
Besides, there’s this half baked truth being endorsed and promoted everywhere – Power of Compounding in SIP, or perhaps get benefits of compounding in SIP etc. etc.
Sounds like I’m gone nuts?
Ok. Let’s consider few things, starting from the definition of compounding.
What is Compounding?
Compounding is a financial concept that refers to the process where the value of an investment grows exponentially over time, not just based on the initial principal amount but also on the accumulated interest or returns earned on that principal. In simpler terms, it’s the idea of earning interest on both the original amount invested and the interest that has already been earned.
Here’s a straightforward example to illustrate compounding:
Let’s say you invest Rs 10,000 in a savings account that offers an annual interest rate of 5%. At the end of the first year, you would earn Rs 500 in interest, making the total value Rs 10,500.
Now, in the second year, the interest is calculated not only on the initial Rs 10,000 but also on the Rs500 interest earned in the first year. So, with a 5% interest rate, you’d earn Rs 525 in the second year, bringing the total to Rs 11,025
As you can see, each year you earn interest not just on the original amount but also on the interest that has accumulated. Over time, compounding can significantly boost the overall value of an investment, making it a powerful force in long-term wealth accumulation.
However, nothing of this sort happens with your monthly SIP.
Now that’s not really what your fund manager told you?
Ok. Now, let’s understand how your monthly SIP works.
For better clarity, let’s take my example:
So, every month a certain amount is deducted from my account on the specified date chosen by me, and then it goes in 7 different funds (all are equity funds) chosen by my fund manager. These mutual funds have NAV units.
Each fund has its own set of stocks. When the stocks go up, the NAV units go up and so does your capital.
Over a period of 2 years with regularly investing monthly, I saw a whopping 18% up during the bull phase and when the market were down in a bearish mode, (and my stocks in my demat account tanked brutally), I was still up by 0.8% to 1.8%.
Sounds relieving right? That’s what SIP is for – giving you good returns in bullish market, saving you during the bearish phase and accumulating your wealth in the process?
And this is how it works throughout the years, whether you keep it for 1 year, 5 years, 15 years or 20 years. Plus, there is exit load, expense ratio, switch price, and then the capital gains taxes.
Where’s the compounding?
In SIP, you are only averaging – sometimes at low (during the bear period) and at times extensively high, when the bulls are high on ride.
Now let’s come to investing in individual stocks as an individual investor.
There are hundreds and thousands of reliable and reputed companies – large-cap, mid-cap, small-cap in different sectors, that are fundamentally very strong, give dividends and easily give 15 to 20% in a month’s time and some even 30 to 70% in a span of 2 to 3 months.
In one of our previously published article of March 26, 2022 titled Safe Reputed Penny Stocks to Buy in 2022: Some Even Give Good Dividends, you will see we had listed 4 dividend paying highly reputed stocks – SJVN (7-10% dividend yield), PNBGILTS (10 to 14%), NHPC and RVNL (6%).
Interestingly from the day of our publishing, SJVN went from Rs.27 something to 85+ in 1.5 years’ time (that’s more than 300%), PNBGILTS from Rs 60 something to 90+, NHPC from Rs 39 to Rs 63+, RVNL from Rs 39 to Rs 173+ (that’s more than 425% in a period of 1.5 years’ time).
Now imagine investing in these safe and reputed government stocks, availing dividends, exiting by booking profits and then with the same sum making an entry in different stock or maybe same stock. That’s how compounding works and within 2 years, you get massive returns.
Also, in stock market, whether you are overall plus or minus, isn’t relevant. Why? Well because, you sell individual stocks at their own helm. Besides, you are never in loss until you decide to sell the stock at loss. And then, there’s this famous Hindi line that stands true, “Insaan ho ya stock, jaana toh sabko upar hi hai!”
Now, you might be wondering that’s a lot of study and research of the Stock Market
Well, not really,
All you have to do is search for reputed stocks with good fundamentals and a P/E that is low preferably less than 20, the lesser the better.
Based on the above three factors – safe, reputed, high dividend paying stocks and a good P/E ratio, I made an entry in PFC (Power Corporation of India) at Rs. 124 and REC (Rural Electrification Corporation) at Rs 113 and sold them both within a year by availing a 110% profit in each, plus the dividends. (I’m sure you might be thinking had I waited till date, I could have made a fortune. Yes, that’s right!)
Also Read: 11 Top Dividend Stocks Whose Dividend Yield Is More than FD Interest Rates
The entire profit plus dividends were re-invested in various stocks giving 25-30% in a 3 months’ time, some giving 15% in a month’s time.
If you search and invest in any reputed company having good fundamentals, low P/E at a price that is safe to invest, it isn’t difficult to make 10 to 15% in a month or a two months’ time. NMDC, GAIL and NHPC could give 25% recently in less than two month
Now that’s what compounding is, right? Can you see that in monthly SIP, I bet not
And if you have apprehensions you can always avail expert’s list of recommendations from your stock market broker.
Or best, by acquiring knowledge and self-studying more about Fundamentals and Technical charts (hint: most reliable are RSI, MACD, On balance volume, ADX).
Lastly,
So, overall I realized, while I could make 18 to 20% in SIP during bullish phase, I could easily make 10 to 30% in swing trading in a period from 1 to 3 months – and now I do not have to monitor the screens actively because this is CNC (delivery).
Besides, if I would invest for long-term like 5 to 10 years in specific stocks, my returns would be massive unlike SIP where maximum I can wish for is 25% including exit load, expense ratio.
That’s how Warren Buffet, Rakesh Jhunjhunwaala could build wealth, right? by investing in stocks
And that’s how and why I decided to cut half of my SIP amount and divert the same in my demat account; only to further reduce the same amount in near future.
No wonder, SIP is better than banks FD but that’s what it is. Period! SIPs may be better than traditional bank FDs, but they fall short when it comes to true compounding and substantial wealth creation. Yes, the reality is not as rosy as it’s often portrayed.
If you have a different perspective or believe there’s a brighter side to investing in monthly SIP that I might be missing, feel free to share your views in the comments section. After all, the beauty of the financial world lies in shared insights.
