Most often, we fix our SIP amount and the investment horizon as per our need as completely independent variables. We decide on a certain sum that we feel comfortable with investing in a particular mutual fund scheme and take a vague notion of the ‘long-term’ as our time horizon. But in practice, these two are interdependent and hence not truly independent. When it comes to large-cap funds, which are most representative of the Indian market and offer a good amount of stability, this interdependence is even more important to understand.
The Seesaw That Is Not Discussed Enough
The best large cap mutual funds are those that park money in the top 100 companies in terms of market value (typically those with a market value of ₹20,000 crore and more). These funds offer a certain degree of stability and have more predictable returns than mid or small-cap schemes. While the absolute returns on such instruments are not the highest, their power lies in compounding. Large-cap funds are more like relationships – the longer you stay invested, the higher your returns will be.
What the above paragraph means is that in large-cap funds, you can either increase your SIP amount to get the corpus size you want or you could increase the time of your SIP to get the corpus size you want. Both of these have an inverse relation to each other, i.e. the higher your SIP, the lower the time required and vice versa. But time has a far greater impact on the corpus size of your SIP than the amount. Here is a realistic example – if you invest ₹10,000 per month in a large-cap fund scheme for 10 years, assuming a yearly return of 12%, you would get around ₹23 lakh. If you keep the same ₹10,000 as your SIP but increase the time to 20 years, you would get around ₹99 lakh. But if you keep the same SIP amount and time (10 years and ₹10,000 per month respectively) and increase the rate of return to 25% (extremely high for large-cap funds), you would get ₹33 lakh (see the table below).
Why Large Caps Call For A Longer Time Horizon
While large-cap funds are less volatile than their mid and small counterparts and offer more stable returns, the absolute returns are not the highest, especially if you have a shorter time horizon. It is not unusual for the best-performing large-cap funds (Nippon India Large Cap, Invesco India Largecap, etc.) to see a CAGR of 14%-15% on a 10-year rolling basis. But on a 1-year basis, returns for these schemes could be as low as 5%, depending on the market conditions. So, if you are looking at a 3-year time horizon to get decent returns in large-cap funds, you might be in for a disappointment. This is why the Mutual Fund calculator is so useful. On the other hand, if your time horizon is 10 years or more, anything below 20% CAGR would also be considered a disappointment. It is a good idea to use some expected rate of return that you would get on a monthly amount that you could spare.
A Simple Table to See It Clearly
| Monthly SIP | 10 Years (12%) | 20 Years (12%) | 25 Years (12%) |
|---|---|---|---|
| ₹5,000 | ~₹11.6 lakh | ~₹49.5 lakh | ~₹94.8 lakh |
| ₹10,000 | ~₹23.2 lakh | ~₹99 lakh | ~₹1.9 crore |
| ₹15,000 | ~₹34.8 lakh | ~₹1.48 crore | ~₹2.85 crore |
The math is not magic. It is just time doing its job.
The Takeaway
Do not think of your SIP amount in isolation. Use the SIP calculator provided by Angel One to get an idea of how your corpus would look on increasing or decreasing your SIP amount or time of the SIP. Then visit the large-cap mutual fund category on Angel One and shortlist a few funds according to your risk appetite and expected returns. Both the amount and time are important, but time has a much more significant impact. Plan accordingly.
