Long-term wealth building: Why a 20-year SIP investment plan can be a suitable strategy

Building wealth is a lifelong endeavour that requires discipline, patience, and a long-term outlook. While there are no shortcuts to amassing significant savings and assets, investing small amounts regularly in a systematic investment plan (SIP) over an extended period can help one accumulate a sizeable corpus. A 20-year SIP investment plan is one such powerful yet underutilized strategy that offers the potential for creating lasting wealth.

• Table of contents

• An introduction to 20-year SIP investments
• Advantages of investing in SIPs for 20 years
• Why choose a 20-year SIP plan?
• Risks and challenges of investing in SIPs for long term
• Who should invest in SIP for 20 years?
• Steps to start an investment in 20-year SIP
• Factors to consider while choosing the 20-year SIP plans

An introduction to 20-year SIP investments

A systematic investment plan or SIP allows investors to contribute fixed amounts periodically into a mutual fund scheme over the long term. SIPs make investing easy and accessible through small, regular investments as opposed to large one-time lumpsum payments. When continued over long durations, SIPs benefit from the power of compounding and the averaging out of market highs and lows. Additionally, a 20-year SIP harnesses the full potential of these effects by investing consistently over two decades. It also inculcates the habit of long-term saving and allows investors to build a substantial corpus through even modest monthly contributions. While requiring patience and discipline, 20-year SIPs have proven to be a simple, effective approach to wealth creation for regular investors.

Advantages of investing in SIPs for 20 years

Committing to a 20-year SIP investment plan has several advantages for investors looking to build wealth over the long run.

Power of compounding - Compounding allows earnings to generate more earnings, accelerating growth in later years. Over 20 years, compounding magnifies gains significantly.

Rupee cost averaging - SIPs invest equal amounts regardless of market levels, automatically buying more units when prices are low and fewer when high. This averages out the per unit cost over time.

Market volatility protection -Instead of timing the markets, long-term SIPs even out short-term volatility through sustained investments. This mitigates market risk.

Investor discipline - 20-year plans enforce investor discipline and commitment, overcoming impulses for quick gains or market exits during downturns.

Goal planning - Setting a 20-year horizon matches the timeline for major financial goals like retirement planning or children's higher education.

Why choose a 20-year SIP plan?

Stable growth potential - A 20-year SIP targets steady, accelerated growth over two decades, without chasing unrealistic short-term gains. Equity markets have historically delivered reasonable returns over extended periods, despite short-term fluctuations.

Long investment horizon - A sufficiently long duration is required to realize the full benefits of compounding. The 20-year timeline also smooths out interim volatility.

Early start benefits - Starting SIPs early in life, say in the 20s, optimizes returns through both larger investing time horizon and compounding.

Retirement planning - The 20-year timeline aligns well with retirement planning needs of individuals in their 30s or 40s. SIPs can help to build the necessary retirement corpus.

Wealth accumulation - For wealth building, 20-year SIPs provide a suitable combination of regular investments, compounded earnings and long duration to create substantial, sustainable wealth.

20-year SIP investment plans from Bajaj Finserv AMC

Bajaj Finserv AMC offers several schemes that may be suitable for individuals with a 15-year horizon:

• Equity schemes such as Flexi Cap Fund, Large and Mid Cap Fund and Large Cap Fund can be suitable for long-term investors with a high risk-appetite.
• Hybrid schemes such as Multi Asset Allocation Fund and Balanced Advantage Fund can be suitable for investors seeking to combine equity with debt investments for more risk-reward balance.
• Debt funds such as Banking and PSU fund can be suitable for conservative investors who seek relative stability and debt instruments over the high-risk and high-return potential of equity investments.

Risks and challenges of investing in SIPs for long term

Continued investing commitment - Investors must remain disciplined and committed to their SIPs for the entire 20-year period, irrespective of market movements.

Career disruption - Job losses or prolonged instability in earnings can make continuing SIPs difficult. This impacts wealth creation.

Inflation erosion - Inflation eats away at monetary savings over time. Equity investments must appreciate sufficiently to offset this.

Liquidity compromise - Long tenure may imply no withdrawal flexibility for 20 years. Investors must not need these funds elsewhere urgently.

Taxation changes - Future changes in capital gains or withdrawal taxes can reduce net gains vis-a-vis current tax regimes.

Who should invest in SIP for 20 years?

Young earners -Those starting their career in their 20s or early 30s can begin 20-year SIPs early, allowing time for substantial wealth creation.

Middle-aged investors - People in their late 30s or 40s looking for retirement planning or children's education funds over next 20 years.

Disciplined investors - Committed investors with income stability and ability to make regular investments for two decades.

High risk appetite - Equity investments carry market risks, so investors should have sufficient risk tolerance for equity exposure over long term.

Long investment horizon - Investors not needing access to funds over the tenure and willing to remain invested for the full 20 years.

Steps to start an investment in 20-year SIP

1. Determine monthly affordable investment amount based on income stability and savings capacity. Even small SIPs can accumulate significantly over 20 years.
2. Choose an appropriate equity mutual fund scheme offered by Bajaj Finserv AMC to invest in. Consider the risk profile and goals.
3. Fill up the SIP application form and mandate for standing instructions to debit SIP instalments.
4. Provide KYC documents and banker details for KYC-compliance and registration of SIP mandate.
5. Activate the 20-year SIP with the first monthly contribution. Subsequent instalments get auto-debited.
6. Track SIP performance quarterly and review investments periodically, but avoid withdrawing midway.

Factors to consider while choosing the 20-year SIP plans

When selecting a 20-year SIP plan, investors must evaluate multiple aspects to ensure it aligns with their goals and risk appetite. A key consideration is the types of equity funds on offer and their historical performance across market cycles. Opting for diversified equity funds with experienced fund management and a track record of consistent long-term returns can provide more stable growth potential over 20 years. Investors should also assess the minimum investment amount to determine affordability of sustaining the SIP for the full tenure. Reasonable expense ratios and fees are preferable to optimize gains.

Online account access for tracking investments and dedicated investor awareness services add significant convenience and support. Also, evaluate the financial stability and track record of the fund house for assurance that the fund will sustain operations over the next 20 years. For risk-averse investors, availability of debt funds and hybrid funds alongside equity funds within the SIP offerings provides ways to balance risk exposure. Ultimately, aligning the SIP plan with one's specific investment goals, income levels, and risk tolerance is key to leveraging the full potential of long-term compounding.

Conclusion

Starting a systematic investment plan with a sufficiently long 20-year horizon allows investors to fully harness the power of compounding and potentially create wealth through monthly disciplined investments. While requiring commitment and patience, 20-year SIPs with equity exposure have proven to be a simple, achievable way for individuals across income levels to achieve financial security and long-term goals like retirement. Hence, for investors willing to invest for the long term, such SIP plans warrant serious consideration.

FAQs:

How much should one invest monthly?

The ideal monthly SIP investment amount is based on one's disposable income, financial responsibilities, savings capacity and investment goals. Even small sums of Rs. 500 - 1,000 invested regularly in SIPs over a long tenure of 20 years can potentially grow to a sizable corpus due to the compounding effect. Young investors should aim to invest higher sums each month for bigger wealth creation potential.

Can SIPs be modified during the tenure?

Most SIP providers allow investors the flexibility to increase, decrease or temporarily pause their SIP instalments after the initial commitment period, based on changing financial circumstances. This allows investors to adjust their investments to align with income flow or new financial priorities during the 20-year tenure.

Tax implications of SIP for 20 years?

Under the latest regime, withdrawals from equity mutual funds after 12 months are classified as long term capital gains and taxed favourably at 12.5% on returns beyond Rs. 1.25 lakh in a financial year. Dividends from mutual funds also attract taxation. While taxation impacts should be considered, the long investment horizon of 20-year SIPs is well-suited to enjoy long term capital gains tax benefits.

Which SIP gives the highest return in the last 20 years?

Over a long tenure of 20 years, diversified equity mutual funds have delivered among the highest inflation-adjusted annualized returns (of over 15% on average) based on historical data. SIPs investing in a combination of multicap, large cap and midcap funds are likely to optimise wealth- creation potential over 20 years. However, it must be noted that past performance may or may not be sustained in the future.

If I invest Rs. 500 per month in SIP for 20 years, how much will be my return after 20 years?

Assuming a moderate nominal annualized return of 12%, a monthly SIP of Rs. 500 over 20 years could grow to around Rs. 5 lakhs on maturity. (for illustrative purposes only)

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.