Mutual Fund – Systematic Investment Plans (SIPs)
Systematic Investment Plan (SIP) popularly called SIP works on the principle of regular and continues investments. It is like bank recurring deposit where you put in a small prefixed amount every month for a fixed tenure. . This is a systematic approach to build wealth over the years and the discipline relieves the investor of the risks and pressures of timing the market.
To invest in a Mutual Fund Scheme by making smaller periodic (monthly or quarterly or even smaller intervals) investments of Rs 500 each in place of a one-time investment of minimum Rs 5,000 or more as per the scheme terms and conditions . It is true that SIP is for those who cannot estimate the market and those who are having low/medium risk appetite; the fact remains that anyone can become a SIP investor. All you need to do is plan your savings and set aside a small amount every month to be invested in a mutual fund that is either a diversified equity fund, balanced fund, debt fund, sector fund or liquid fund. Post-dated cheques, Debit Mandate, can be given to the Mutual Funds, the investor being at liberty to redeem or stop SIPs at anytime as he wishes. There is no specific condition that he needs to continue the SIP payment for specific period of time. The gain you are going to get from the scheme is purely depending on the market condition and individual performance of the selected scheme.
It is imperative to understand the concept of rupee cost averaging and the power of compounding, to better appreciate the working of SIPs. SIP has brought mutual funds within the reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, one-time investment. While making small investments through SIP may not seem attractive at initial stages, it enables investors to get into the habit of saving. SIP is also suggested to all who cannot afford to invest a lump sum in the mutual fund schemes. It is suggested to select a good fund with good track record showing a constant growth of at least 10% to 15% per annum over a period of 3 to 5 years, this reveals that the fund has been through various stages of the market and has survived all of them, hence the chances of such a fund performing well over the coming years are better versus new fund which was launched recently. It is not recommended to invest in Mutual Fund IPOs. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 5,000 at the rate of 10% would grow to Rs 20.90 lakh in 15 years.
Please see the below table
| Monthly Savings – The return your investment may generate |
| SIP Investment per month | Total amount invested | Rate of return |
| (for 15 years) | (Rs. in Lakhs) | 6.00% | 8.00% | 10.00% |
| | | (rupees in lakhs, 15 years later)* |
| 5000 | 9 | 14.6 | 17.4 | 20.9 |
| 4000 | 7.2 | 11.7 | 13.9 | 16.7 |
| 3000 | 5.4 | 8.8 | 10.4 | 12.5 |
| 2000 | 3.6 | 5.8 | 7 | 8.3 |
| 1000 | 1.8 | 2.9 | 3.5 | 4.2 Bottom of Form |
The above table is only for comparison purposes
In short the SIP mode of investment reduces the average purchase cost, even in volatile markets.. When you invest a fixed amount every month, the number of mutual fund units you actually buy depends on their prevailing scheme's Net Asset Values (NAV). Therefore, with the money you invest each month, you can buy fewer units when the market moves up and more units when the market comes down. This means you are averaging out your cost. If you invest Rs 2,000 a month at a price of Rs 12 per unit, you will have bought 166.6667 units (2000/12). However, if the price is Rs 15.00 per unit, you will get only 133.3333 units (2 000/15). Investing a fixed sum regularly means averaging out the cost, as you get fewer units when the price goes up and more when the price comes down. This scheme is basically for those who cannot watch or track the market regularly or do not wish to take much of risks,
The below example shows the Rupee Cost Averaging
| | | SIP Investments | One Time Investment |
| Month | NAV | Amount | Units | Amount | Units |
| 1-Jan | 9.345 | 1000 | 107.0091 | 12000 | 1284.11 |
| 1-Feb | 9.399 | 1000 | 106.3943 | | |
| 1-Mar | 8.123 | 1000 | 123.1072 | | |
| 1-Apr | 8.75 | 1000 | 114.2857 | | |
| 1-May | 8.012 | 1000 | 124.8128 | | |
| 1-Jun | 8.925 | 1000 | 112.0448 | | |
| 1-Jul | 9.102 | 1000 | 109.866 | | |
| 1Aug | 8.31 | 1000 | 120.3369 | | |
| 1-Sep | 7.568 | 1000 | 132.1353 | | |
| 1-Oct | 6.462 | 1000 | 154.7509 | | |
| 1-Nov | 6.931 | 1000 | 144.2793 | | |
| 1-Dec | 7.6 | 1000 | 131.5789 | Bottom of Form | |
Total units bought by way of investing SIP - 1,625.3521 (average cost Rs. 7.38), total units bought by way of one time investment - 1,284.11 (average cost 9.345) at a total cost of Rs. 12,000.00.
Suppose if you buy the units of a fund, when the NAV is high, if the market dips after that, the value of your investments falls and you may have to wait for the market to go up to make a gain on your investment. But, if you invest via a SIP, you do not buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time. You will end up buying some units at a high cost and some units a lower price. Over time, your chances of making a profit are much higher when compared to an one-time investment
Advantages of investing in Mutual Funds Systematic Investment Plans ( SIPs)
The following are the advantages of investing though SIPs
1) Power of compounding: The power of compounding or the concept of multiplying your money over a period of time will work properly only if invested at an early age. The longer you delay investing, the greater is the chances of not achieving your desired goals. If you start investing, your money at an early age, the greater will be the power of compounding with a significant impact on your wealth accumulation.
2) Rupee cost averaging: Everyone cannot speculate or time the market. Rupee cost averaging is an automatic market timing method eliminating the need to time the market. A SIP investor does not have to worry about where the market heads. Though SIP mode of investment does not guarantee any returns, however it minimises the loss that one would otherwise face in a fluctuating market.
3) Convenience: SIP is also perhaps the most convenient mode of investing. All that the investor has to do is provide post-dated cheques/Debit Mandate, complete with the enrolment form (need to complete the KYC requirements also, if you are a first time investor). The cheques will be banked/money will debited from your bank account on the pre-specified date on very month and the units will be credited into your account. The SIP facility is mostly available in all types of mutual funds schemes.
4) Regular saving habit/saving discipline : The most important benefit of starting SIP is that it forces you to set apart some money every month and enforces saving discipline on you and the contribution amount will be directly debited from your bank account automatically based on your standard instruction (either Direct Debit or postdated cheques)
5) Protects you from market volatility: If you have already committed money to a Mutual Fund SIP, you will most likely continue to invest regardless of a big fall or huge gains in the market. This in turn will enable you to invest regularly rather than try to time the market , which not many small investors can do successfully.
6) Tax planning: Starting an SIP in a Tax Savings Mutual Fund schemes will help the investors to reduce his tax liability to certain extant. The investor also gets the benefits of long term capital gains. If your investment is in equity fund, you need not to pay the long term capital gain tax for the gain you attained while selling the units. For calculating capital gain tax, each installments of your SIP will be considered separately (FIFO method will be followed). The dividend received from mutual fund schemes are completely exempted from income tax.
7) Accumulation of wealth: Good saving and investing habits are more likely to help you accumulate wealth in the long run, you can achieve this objective by way of investing in good mutual fund scheme through the route of SIP. But there is no guarantee that your goal will be achieved, you need to monitor your portfolio periodically. Suppose, if the scheme you invested is not performing well or market is going down, your goal will not be achieved.
8) 5) Helps of achieve your Financial goals
SIP route of investments is best for achieve your financial goals.
Best Regards
Prakash Nair
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