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Small doses of SIP investment does not help in Wealth Creation

Equity exposure must be significant portion of ones overall investment to create wealth in long term. Let us understand this by an example.

Suppose an individual has monthly savings of Rs 20,000. Now, he/she divides this savings into two parts, mainly:

1. Debt (FD, Savings PPF, Debt MF etc) and
2. Equity (Equity MF, Stocks).

Assume that Debt instrument provides 7% annual returns, while Equity provides 15% annualized return. The chart below shows the overall effective returns bases on distribution of investment.

In the above example, we have taken 4 scenarios, where Equity investment is 10%, 25%, 50% and 75% of overall investment, while rest of the amount is invested in Debt instruments (like FDs, PPF, Debt MF etc).

One can see from the table above that to generate good returns, Equity exposure should be significant. If Equity exposure is only 10-20% of overall saving, then overall returns would be more or less near Debt returns only.

So what should be ideal percentage of Equity exposure?

Subtract your age from 80. The result will provide percentage of Equity exposure one must have. For example, for a 30 years individual, equity exposure should be upto 50% while for a 50 years individual, equity exposure should be upto 30%.

In case of Defensive investor, Equity exposure must be at least 25% of overall investment. Aggressive investor can take Equity exposure upto 75% of ones overall investment.

However, equity exposure should be reviewed every year. In early age, Equity investment should be high and it should reduce with increasing age. Alongwith that, one should increase SIP amount (5 to 15 %) every year with the increase in income.