A Financial Resolution This New Year

Yet another New Year is round the corner. We all make New Year resolutions; few kept and most unkept. This new year make a 'financial' resolution; open a SIP ! This will be the best gift to yourself.

You must have heard about 'SIP' a lot now with '#MutualFundsSahiHai' promotion. I just want to emphasize the importance of 'financial discipline' with Mutual Funds. I started this with a small amount of ₹ 2,000 per month in October 2011.

Traditionally, most people start saving via Recurring Deposits (RD) and after few years the accumulated amount is invested into Fixed Deposit (FD). This is the most conservative way of savings adopted by most in India which though is risk free is less rewarding. Let's see how ₹ 2,000 per month deposit work out via this approach.

Principal (P) = ₹ 2,000

Instalment = 36 months

Rate of Interest (r) = 8% (compounded quarterly)

Month	P	r	Months remaining	Years	nt	(1+r/n)^nt	A	Cumulative
1	2000	0.08	36	3.000	12.000	1.278	2,555.20	2,555.20
2	2000	0.08	35	2.917	11.667	1.269	2,537.87	5,093.07
3	2000	0.08	34	2.833	11.333	1.260	2,520.66	7,613.72
4	2000	0.08	33	2.750	11.000	1.252	2,503.56	10,117.28
5	2000	0.08	32	2.667	10.667	1.243	2,486.58	12,603.86
6	2000	0.08	31	2.583	10.333	1.235	2,469.72	15,073.58
7	2000	0.08	30	2.500	10.000	1.226	2,452.97	17,526.55
8	2000	0.08	29	2.417	9.667	1.218	2,436.33	19,962.88
9	2000	0.08	28	2.333	9.333	1.210	2,419.81	22,382.69
10	2000	0.08	27	2.250	9.000	1.202	2,403.40	24,786.09
11	2000	0.08	26	2.167	8.667	1.194	2,387.10	27,173.19
12	2000	0.08	25	2.083	8.333	1.185	2,370.91	29,544.10
13	2000	0.08	24	2.000	8.000	1.177	2,354.83	31,898.93
14	2000	0.08	23	1.917	7.667	1.169	2,338.86	34,237.79
15	2000	0.08	22	1.833	7.333	1.161	2,323.00	36,560.79
16	2000	0.08	21	1.750	7.000	1.154	2,307.24	38,868.03
17	2000	0.08	20	1.667	6.667	1.146	2,291.60	41,159.63
18	2000	0.08	19	1.583	6.333	1.138	2,276.05	43,435.68
19	2000	0.08	18	1.500	6.000	1.130	2,260.62	45,696.30
20	2000	0.08	17	1.417	5.667	1.123	2,245.29	47,941.59
21	2000	0.08	16	1.333	5.333	1.115	2,230.06	50,171.65
22	2000	0.08	15	1.250	5.000	1.107	2,214.94	52,386.58
23	2000	0.08	14	1.167	4.667	1.100	2,199.91	54,586.50
24	2000	0.08	13	1.083	4.333	1.092	2,184.99	56,771.49
25	2000	0.08	12	1.000	4.000	1.085	2,170.18	58,941.66
26	2000	0.08	11	0.917	3.667	1.078	2,155.46	61,097.12
27	2000	0.08	10	0.833	3.333	1.070	2,140.84	63,237.96
28	2000	0.08	9	0.750	3.000	1.063	2,126.32	65,364.28
29	2000	0.08	8	0.667	2.667	1.056	2,111.90	67,476.18
30	2000	0.08	7	0.583	2.333	1.049	2,097.58	69,573.76
31	2000	0.08	6	0.500	2.000	1.042	2,083.35	71,657.11
32	2000	0.08	5	0.417	1.667	1.035	2,069.22	73,726.33
33	2000	0.08	4	0.333	1.333	1.028	2,055.19	75,781.52
34	2000	0.08	3	0.250	1.000	1.021	2,041.25	77,822.77
35	2000	0.08	2	0.167	0.667	1.014	2,027.41	79,850.17
36	2000	0.08	1	0.083	0.333	1.007	2,013.66	81,863.83
						Total	81,863.83

After 36 months, total investment of ₹ 2000 X 36 = ₹ 72,000 will become ₹ 81,863.83 at an interest of 8% compounded quarterly. (This can be validated at RD Calculator)

At the end of 36 months, put the matured amount of ₹ 81,863.83 into a fixed deposit for lets say 3 years. At an interest rate of 8% per annum, the matured amount will be ₹ 1,03,986. (This can be validated at FD Calculator)

Instead of the above approach, I invested ₹ 2000 per month into an equity fund via SIP for 36 months. The return on this is tabulated below

Date	Units	Amount	Total Units	Total Amount
25 Oct 2011	118.835	2000	118.835	2,000
25 Nov 2011	127.714	2000	246.549	3,860.95
26 Dec 2011	130.548	2000	377.097	5,777.14
27 Jan 2012	118.765	2000	495.862	8,350.31
26 Mar 2012	118.203	2000	614.065	10,390.01
25 Apr 2012	117.509	2000	731.574	12,451.37
25 May 2012	124.146	2000	855.72	13,785.7
25 Jun 2012	120.12	2000	975.84	16,247.75
25 Jul 2012	118.273	2000	1094.113	18,501.48
27 Aug 2012	114.09	2000	1208.203	21,179.82
25 Sep 2012	108.992	2000	1317.195	24,170.49
25 Oct 2012	106.44	2000	1423.635	26,750
26 Nov 2012	106.553	2000	1530.188	28,721.63
26 Dec 2012	102.459	2000	1632.647	31,869.27
25 Jan 2013	99.651	2000	1732.298	34,767.3
25 Feb 2012	103.681	2000	1835.979	35,415.92
25 Mar 2013	107.933	2000	1943.912	36,020.72
25 Apr 2013	104.493	2000	2048.405	39,206.55
27 May 2013	101.163	2000	2149.568	42,497.12
25 Jun 2013	107.411	2000	2256.979	42,025.1
25 Jul 2013	105.876	2000	2362.855	44,634.38
26 Aug 2013	112.296	2000	2475.151	44,082.62
25 Sep 2013	107.296	2000	2582.447	48,136.87
25 Oct 2013	100.2	2000	2682.647	53,545.85
25 Nov 2013	98.522	2000	2781.169	56,457.83
26 Dec 2013	93.327	2000	2874.496	61,600.52
27 Jan 2014	96.339	2000	2970.835	61,674.61
25 Feb 2014	93.765	2000	3064.6	65,367.67
25 Mar 2014	88.692	2000	3153.292	71,106.57
25 Apr 2014	85.8	2000	3239.092	75,503.31
26 May 2014	77.882	2000	3316.974	85,179.48
25 Jun 2014	72.966	2000	3389.94	92,918.35
25 Jul 2014	70.102	2000	3460.042	98,714.5
25 Aug 2014	67.568	2000	3527.61	1,04,416.59
25 Sep 2014	65.359	2000	3592.969	1,09,945.65
27 Oct 2014	64.872	2000	3657.841	1,12,771.03

After 36 months, total investment of ₹ 2000 X 36 = ₹ 72,000 became ₹ 1,12,771.03 which in earlier case was ₹ 81,863.83. I didn't put any more money into this fund and left the fund as is for another 3 years unlike putting into a FD. The NAV i.e. total amount as on date 7 Dec, 2017 was ₹ 1,75,064.27. Annual return turns out to be 20.85%.

You can clearly see that the difference is huge after 6 years.

₹ 1,75,064.27 - ₹ 1,03,986 = ₹ 71,078.27 (Seventy One Thousand Seventy Eight Rupees and Twenty Paise).

To put this in another way, the first approach will need additional 3+ years approximately to break even with approach two assuming return on SIP is '0%' from now onwards.

Even with a small amount of ₹ 2000 per month, SIPs makes a huge difference in 5+ years. The figures quoted above is actual data from one of my SIP. In the above example, I am not taking into account that while interest on RD and FD is taxable, gains are free in equity MFs after one year. It is also true that returns are not guaranteed to be this high always but India, as a country, is in very exciting phase; hence make the best use of it.

So, make a financial resolution of opening a SIP this new year and gift yourself one of the best gift. Amount is immaterial and depends on each individual. The paramount importance is 'financial discipline'. In conclusion, #MutualFundsSahiHai.

(Note: I would be happy to answer your queries. Follow me at @_manish25)