How Investing In SIPs Can Ease Out Inflation

It's been almost more than a month since consumers have been dealing with high vegetable prices. A recent report by HSBC has added insult to injury by revealing that the country could face a shortage of cereals, which would drive inflation higher. Despite the expectation that vegetable prices will ease in the coming month due to the government's initiatives, this new revelation has raised concerns.

To maintain purchasing power, one needs to plan investments wisely. Inflation refers to the overall increase in prices of goods and services over time. It erodes the purchasing power of money, meaning a rupee tomorrow will be worth less than a rupee today. The real value of money reduces in an inflationary economy making one poorer.

Bhuvanaa Shreeram, Co-Founder & Head of Financial Planning, House of Alpha, explained, “If you are keeping your money in a savings account that earns four per cent annually while the inflation rate is seven per cent, you are effectively losing three per cent of your money's purchasing power each year. In this case, over a 10-year period, you would lose about 26 per cent of your savings' purchasing power.”

By investing in systematic investment plans (SIP), one can average out the prices per unit. 'SIPs work by allowing one to invest a fixed amount of money regularly (e.g., weekly, monthly, or quarterly, depending on the mode of investment chosen by the individual) in a mutual fund. This disciplined approach helps you buy more units when the prices are lower and fewer units when prices are higher, potentially reducing the impact of market volatility and building wealth over the long term,' explained Saurav Basu, Head – Wealth Management, Tata Capital.
 
According to ICICI Securities, investing in mutual fund SIPs is a great way to take advantage of near and midterm market volatility while meeting financial goals. This method has emerged as a reliable and effective strategy to beat inflation.

“SIPs encourage disciplined and consistent investing over time. As investments grow, the power of compounding comes into play, generating returns on both the initial investment and accumulated gains. Over the long term, compounding helps SIP investors accumulate substantial wealth, effectively countering the eroding effects of inflation," as per the company cited above.
 
While Ajit Menon, CEO of PGIM India MF, shared his insights on leveraging the strengths of equity to meet investment objectives, he also acknowledged the residual challenge for investors - maintaining a disciplined approach amidst shorter-term market movements and avoiding reactive decisions.

A SIP (Systematic Investment Plan) emerges as a potential solution to this challenge, especially for salaried individuals and those with regular cash flow. SIPs offer a convenient and effective method of investing from a regular income, automating the investment process and promoting disciplined investing.

However, Menon pointed out that if one is reasonably sure that the markets will move up in the long term, lump sum investments might outperform SIPs over the long haul. Thus, the advantage of SIP lies more in its suitability for investors seeking a systematic and steady approach to wealth accumulation.
 
Hedge Against Inflation
It is not magic, but a system that needs time to reflect a peak. 'Over the long term, SIP investments (in equities) have the potential to generate higher returns, which can outpace inflation and help preserve your purchasing power,' added Basu.

On the other hand, ISEC explained that SIPs encourage disciplined and consistent investing over time. As investments grow, the power of compounding comes into play, generating returns on both the initial investment and accumulated gains. Over the long term, compounding helps SIP investors accumulate substantial wealth, effectively countering the eroding effects of inflation.

Maitry Shah, Founder of LakshMe, said that equity is one of the few avenues for investment that has the potential to generate higher returns than inflation in the long run. However, it requires time, knowledge, and effort to research the company's financial health. The SIP route helps in overcoming this.

According to Himanshu Kohli, Co-founder of Client Associates, one of the most significant advantages of investing via SIPs is that they work on the power of compounding, which means that the accumulation of monthly investments compounds to generate exponential returns over a long period. The value of the investments grows over time as the investments are made every month, irrespective of the market movements. This will create wealth and help generate inflation-adjusted returns if the investor continues to invest over a long period.

Satyen Kothari, Founder, and CEO of Cube Wealth, added that during inflationary periods, SIP investments can be advantageous if aligned with one's financial objectives and risk tolerance.

"SIP investments, if done uninterruptedly, can act as a natural hedge against inflationary pressures and provide better returns over time," said Manu Rishi Guptha, the Founder & CEO of MRG Capital. He added, "It is important not to succumb to market volatilities and continue the investments until the financial goals are reached. Market timing can be employed by increasing the SIP amount during significant market downturns, which will further improve the returns once the markets recover."

Investing In Diverse Portfolio
This is the advantage of discipline and consistent investing, as most of the experts explained how it can ease purchasing power during inflation. Shreeram, cited, 'As SIPs typically invest in a diverse portfolio of securities, including equities, bonds, and other assets, some of these asset classes (like equities) have historically provided higher returns than the rate of inflation over the long term.'

Returns from SIPs in equity funds have the potential to outpace inflation over the long term. SIPs enforce financial discipline, which can lead to wealth accumulation over time. The power of compounding comes in handy in SIPs as returns generated from the investment are reinvested, creating the potential to generate more returns. SIPs can be started with small amounts and can be stopped or modified at any point, offering flexibility based on changing financial conditions or goals.

Shreeram also explained that despite having many advantages, it also carries some risks. The key is to align consumers' investment choices with their financial goals, risk tolerance, and investment timeline.