Inflation affects everyone. It slowly eats away at the value of money over time. What you can buy with Rs. 100 today may cost Rs. 120 or more a few years later. This is why just saving money in a bank account might not be enough. In order to keep your purchasing power, you have to make your money grow faster than the inflation rate. At this point, the process of investing comes into play.
Out of the numerous ways to invest, the one that is most commonly used for the purpose of capital growth is a mutual fund SIP plan focused on equity funds. However, is it a reliable strategy for beating inflation in the long term? Let’s take a closer look at the situation.
What is inflation?
Inflation is the rise in the prices of goods and services over time. It reduces your purchasing power. For example, if inflation is 6% per year, something that costs Rs. 1,000 today may cost Rs. 1,060 next year. Over 10 years, this can make a huge difference. If your income or savings don’t grow at the same pace or faster, you may find it harder to maintain your lifestyle.
Why Not Just Save?
Saving is important, but saving alone is not enough. A few traditional savings options offer lower returns, often below or just equal to inflation. This means your money is not actually growing in real terms. In fact, you may be losing value without realizing it. However, returns on Traditional saving options like fixed deposits or regular savings accounts are guaranteed, but returns of Mutual Funds are subject to market risk.
What is a Mutual Fund SIP Plan?
A mutual fund SIP plan allows you to invest a fixed amount regularly – monthly, quarterly, or as per your comfort into a mutual fund. SIP stands for Systematic Investment Plan. It helps you build wealth gradually, without needing a big lump sum at once.
When you choose to invest in equity mutual funds through SIPs, your money has the potential to give relatively better returns over a long period. However, they also carry some risks in the short term due to market ups and downs.
How Can Equity Mutual Funds Beat Inflation?
Equity mutual funds aim to grow your money at a faster rate than inflation. However, past performance may or may not be sustained in the future.
Suppose you allocate Rs. 5,000 every month into an equity mutual fund via SIP for 15 years. If you use a SIP calculator, you will see that with a 12% average return, your Rs. 9 lakhs total investment will be worth more than Rs. 25 lakhs. Even if you deduct the inflation, you would still have a significant amount of money in your hands.
This is the way one can beat inflation by investing in equity SIPs for a long time.
SIP in Equity Mutual Funds Offers Various Benefits
- Regular Investing: A mutual fund SIP plan forms the habit of systematic investing. That is why it is the most effective way of building wealth over the long term.
- Power of Compounding: When your returns earn more returns, your wealth grows faster. SIPs benefit from compounding over time.
- Rupee Cost Averaging: By investing regularly, you buy more units when prices are low and fewer when prices are high. This averages out your cost and reduces risk.
- Start Small, Think Big: You don’t need a large amount to begin. Even Rs. 500 per month can be a good start.
- Flexibility: You can start, stop, or change the amount anytime. It gives you full control over your investment journey.
Long-Term View is Key
Equity mutual funds can be volatile in the short term. Markets go up and down. But historically, over longer periods, equity investments have given relatively better returns than inflation. However, it must be noted that returns from equity mutual funds are market-linked, and past performance may or may not be sustained in the future.
So, if you are investing for long-term goals like retirement, a child’s education, or buying a home, a mutual fund SIP plan in equity funds can be a suitable choice.
Role of SIP Calculator
Before starting an SIP, it’s helpful to plan. An SIP calculator is a simple online tool that helps you know how much you need to invest each month to reach your financial goals. It also shows how your money can grow over time based on expected returns.
Let’s say, for instance, your aim is to create a fund of Rs. 50 lakhs in 20 years. Then, the SIP calculator will guide you in determining the monthly investment required as well as the rate of return needed. This is quite helpful in establishing the goals that are not too far from reality and also in making better plans.
Points to Remember
- Right Fund Selection: Different types of equity mutual funds have different performances. Study the historical performance, the skill of the fund manager, and the level of risk before you invest.
- Do not Sell: Market corrections should not make you lose your nerve. The investment in stocks should be thought of as a long-term investment.
- Periodic Check-Up: Watch your SIP’s progress once or twice a year to ensure you are still on the right track.
- Never Lose Sight of Your Goal: Always associate your SIPs with certain objectives. It provides you with motivation and facilitates your commitment.
Final Words
A mutual fund SIP investment in equity schemes can indeed be an effective method of not letting inflation eat away at your money in the long run. The golden rule is to start off at the right time, stick to the investment plan, and wait patiently. Though markets may be unpredictable in the near future, past experience has it that the stock market rewards the patient.
Being a wise investor and planner, make consistent investments using an SIP calculator. With the passage of time, the accumulation of your modest monthly deposits could turn into a meaningful amount, one that not just surpasses the inflation rate but also assists you in the realization of your aspirations.
Also Read: Invest in SIP or Lumpsum? Here’s What the SIP Calculator Reveals
