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Why SIPs Work Only When You Are at It For Significantly Long Time

No, this blog is not about how a SIP running for long periods (10 years?) lets one weather the market cycles and average your buying cost. Enough has been said about it and that remains. By the way, there’s no standard definition of “LONG PERIOD” as such. It’s left open to investing entity!!!

This blog is more towards accumulating capital, as (HIGH) returns really matter only when they are earned on reasonable amount of capital. Even extraordinarily high returns on piddling capital (savings) don’t amount to much in absolute numbers. And it takes time to build up capital if you are doing it gradually, even after taking impact of compounding.

Let the numbers come to our help. But first, we need to establish some benchmark to evaluate how long should one run a SIP, alongwith a projected rate of return.

Here’s a simple benchmark for SIP duration – my investment should double at the end of SIP period for a particular rate of return. I will consider that duration as “LONG TERM”.  And for starters, I will also assume that I get an annualized ROI of 12%, which incidentally is the most (ab)used rate of return in goal planning.  And to get some comparison, we will also do scenario analysis at high annualized ROI of 15% and extraordinarily high annualized ROI of 20%.

Time for results:

-          At 12% annualized ROI, it takes slightly more than 10 years 6 months for investment to double,

-          At 15% annualized ROI, it takes nearly 8 years 5 months for capital to double, and

-          At 20% annualized ROI, it taken nearly 6 years 4 months for capital to double

And while we are at scenario analysis, how about also checking at lower annualized ROI of 10%? It takes slightly more than 12 years 7 months to double the capital.

While what returns one gets in future are uncertain, what can surely give one a shot at REAL investment success is starting off well informed. If you are going to invest through the most popular way of SIPing it, plan to do it for at least 7 years, and preferably for 10 years plus!!! Chances are you will end up with a very good corpus at the end of your investment horizon!!!

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