When it comes to investing, many people feel overwhelmed by the idea that they need large sums of money to begin their journey. To some new and low-income investors, the stock market and mutual funds can seem like a domain for the wealthy or the financially savvy individuals. However, the Securities and Exchange Board of India’s Chairman, Madhabi Puri Buch, has reiterated a simple yet powerful truth: even a small investment through a Systematic Investment Plan (SIP) of just Rs 250 monthly can lead to significant wealth accumulation over time.

Read More: Sebi Study Reveals 54% Of IPO Shares Sold Within A Week Of Listing

Addressing an event of the Confederation of Indian Industry (CII), Buch said the country may soon see the introduction of Rs 250 per month SIP. According to some media reports, she further stated that Aditya Birla Sun Life Mutual Fund has taken the lead in developing this Rs 250 SIP. If successful, this would become the first of its kind by any mutual fund house in India.

Says Gaurav Goel, a Sebi RIA, “The aim of a small monthly SIP is financial inclusion. While there is a growing trend of financialisation of savings amongst the Indian population, a huge chunk of citizens has not yet joined the bandwagon. As of 2023, only 8 per cent of the Indian population invests in mutual funds. This percentage is a fraction of 46 per cent population that invests in mutual funds in the USA.”

The Concept of SIP: An Accessible Entry Point

SIP is an investment strategy where you regularly invest a fixed amount of money in a mutual fund scheme. “Investments in smaller investment-size SIPs could potentially draw a large untapped population towards mutual funds,” Goel says.

He adds that SIPs are a great way of investing in mutual funds, as “it instils discipline and creates a long-term thinking amongst the investors.” Small-size SIPs would attract more people from the middle and lower middle classes who would be comfortable investing in mutual funds.

Read More: Franklin Templeton Launches Franklin India Medium To Long Duration Fund

The Power of Compounding: Turning Small Contributions Into a Significant Corpus

One of the most compelling reasons to start a SIP, even with a small amount like Rs 250, is the power of ‘compounding’. Compounding is the process where the returns on your investment generate their own returns, leading to exponential growth over time. The longer you stay invested, the greater the compounding effect.

Let’s take an example to illustrate this. Assume you start an SIP of Rs 250 per month with an expected annual return of 12 per cent. Using a SIP calculator, you can estimate the potential corpus after 20 years:

Monthly Investment: Rs 250

Investment Period: 20 years

Expected Annual Return: 12%

Total Investment: Rs 60,000 (Rs 250 x 12 months x 20 years)

Estimated Corpus: Approximately Rs 2.34 lakh

Estimated Returns: Approximately Rs1,89,787

(Angel One SIP Calculator used to calculate returns. Please note: Inflation has not been calculated in the final value of returns).

While Rs 250 may seem like a negligible amount, over 20 years, this small monthly contribution can grow into a substantial sum due to the power of compounding. During the CII event titled “Regulatory Landscape: What is needed for Viksit Bharat?”, the Sebi chair said that with an investment size as low as roughly $3, one can’t even think of buying a Starbucks coffee. “But imagine with less than $3 a month, people will be able to participate in the wealth creation of our nation and that is our path towards a ‘Viksit Bharat’,” she stated.

The example above highlights that even small investments can make a significant difference if you remain disciplined and consistent.

What are the long-term benefits of starting a SIP with a small amount compared to waiting until you can invest a larger sum?

Says Goel, “SIPs are a great way to invest in equity markets as they average out the cost of entry. This helps in avoiding poor timing of lump sum investments in case of an adverse market reaction in the short term.” Any such event can be a huge disappointment for a first-time investor, especially for those coming from low-income backgrounds.

“In the long term, SIPs give significant compounding benefits and the small size of periodic investing ensures that people are comfortable paying them every month from their pocket without disturbing their lifestyle,” he adds.

Read More: What To Do If Your Demat Account Is Frozen

Common Mistakes To Avoid When Investing In SIPs:

Many new investors may end up investing larger sums in one SIP. “It is advisable that investors should invest in more than one SIP from different asset management companies with different investment strategies. This will help investors diversify the risk. The introduction of Rs 250 per month SIP will help them diversify and reduce their risk,” Goel advises.

“Another mistake many investors make is that they stop or redeem their SIPs before the full term of the SIP whenever any need arises. Smaller sizes will ensure fewer dropouts in such situations,” he states.

Taking Inflation Into Account:

According to Goel, high inflation is like termite which shaves away a significant portion of the returns a SIP or investment generates. The best way to tackle inflation and generate high real return on the portfolio is to invest a portion of the wealth in high-return investments like equity mutual funds.

For new investors, SIPs are the best way to play this strategy as they give access to these funds through small periodic investments, which can be easily invested from monthly income.

“However, it should be remembered that equity investments are not meant for all investor communities. They are high-risk investments, and care should be taken while investing in such products,” Goel emphasises.