Rs 20k SIP in risky instrument with high return or Rs 27k SIP in less-risky option? The math of investing more vs chasing higher returns

Investors spend a lot of time and mental bandwidth looking for investment options that give above-average returns. Some even obsess about it. To be fair, there is nothing wrong in that. The problem arises when they invest inadequate amounts and justify it with overconfidence in their own abilities to generate above-average returns.

However, from what little I have learned over the years, you cannot outperform your way out of underinvesting. So while aiming for high returns is one thing, relying on it is another thing. And the latter is where people get it wrong.

It is like focusing on solving an entirely wrong problem. Chasing higher returns feels exciting but the lever that actually moves the needle for your financial goals is not the investment return rate. It is your savings rate. Sounds unglamourous and boring. But there is math to back it.

The math of investing more vs chasing higher returns

Suppose you invest Rs.20,000 monthly for the next 15 years in a comparatively risky instrument which potentially offers high returns of 13-14% per year on average. After 15 years, the expected value of your investment is Rs.1.1-1.2 crore. Now let’s see what happens if you focus on investing more rather than chasing higher returns.

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You invest monthly for the next 15 years in an instrument which gives a lower 11% per year on average. To reach the same corpus size of Rs.1.1-1.2 crore after 15 years, the monthly investment required is Rs.24,000-27,000 approximate. What happens in this scenario is that instead of relying on a risky 13-14% strategy to play out (which may or may not happen), you focus on ‘investing more’ in a comparatively less-risky option giving 11% average annual returns.

In the first scenario, you obsessively chase higher returns, i.e. 13-14%, but invest less at Rs.20,000 per month. In the second scenario, you go for a more predictable average return of 11% but invest a bit more, i.e. Rs.24,000-27,000 monthly.

Unlike higher returns which nobody can guarantee, investing more is something entirely within your control. If you can invest a little more every month, then you will comfortably compensate for the average lower returns.

Different SIP amount & returns scenarios

Note: You can try out similar scenarios comparing investing more versus chasing higher returns. The Securities and Exchange Board of India has a systematic investment plan (SIP) calculator on its website https://investor.sebi.gov.in/ calculators/sip_calculator.html

Aim high, but don’t solely rely on it

Chasing higher returns is a good aim to have. But it’s not as easy as it looks. Having a year or two of above-average returns is easy actually. But doing this consistently, year after year, via a repeatable process, is really difficult.

Markets are uncertain and high returns are not available on demand. For each extra 1% that you want to generate consistently, it takes up a lot of headspace and requires exponentially higher time and effort. Ask anyone who has been in markets for 10-15 years and they will agree with this.

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Options that offer higher returns, come with higher risks. And periodically, these risks come to the fore in big way. And when they do, many become uncomfortable and make mistakes or give up at the worst possible times. So investing more by relying on average returns, doesn’t mean you are giving up. Its about being prudent and making probabilities work in your favour.

How to find money to invest more?

Saying ‘invest more’ is one thing. But how to find extra money to invest more? It is possible that your personal circumstances may not allow you to invest more. However, for most people, there are ways. And you may not like to hear it. Without mincing words, there are two obvious and only options.

Try and earn a little more. And spend a little less. Financial writer Morgan Housel puts it nicely when he says that savings is the gap between your ego and your income. So, if need be, review your expenses ruthlessly.

If, however, for some reason, money/surplus you have is genuinely not enough, then it is okay to take a bit of extra risk in a calibrated manner. But only if your goal’s time horizon is long enough and your risk profile suits such risk-taking.

What we discussed here isn’t complicated. The investors who build wealth over decades are rarely the ones who found the best fund or perfectly timed their entry/exits.

Almost always, these are regular people who consistently saved more money than their peers, increased investments every time their salaries grew, and did not panic when markets fell. That’s it. There is no magic formula.

If there is one takeaway, then let it be that markets don’t owe you extraordinary returns just because your savings rate is low. And how much you invest matters more than how well you invest.

The Author is Founder, Stableinvestor