Systematic Investment Plan
Systematic Investment Plan
Systematic Investment Plan
Supreeth A Raman Supreeth Nag B S Sanjay K S Rajesh C Mohamed Zubair Puneeth Raj Bhanu Prakash
A specific amount should be invested for a continuous period at regular intervals under this plan. SIP is similar to a regular saving scheme like a recurring deposit. It is a method of investing a fixed sum regularly in a mutual fund. SIP allows the investor to buy units on a given date every month. The investor decides the amount and also the mutual fund scheme. While the investor's investment remains the same, more number of units can be bought in a declining market and less number of units in a rising market. The investor automatically participates in the market swings once the option for SIP is made.
SIP ensures averaging of rupee cost as consistent investment ensures that average cost per unit fits in the lower range of average market price. An investor can either give post dated cheques or ECS instruction and the investment will be made regularly in the mutual fund desired for the required amount. SIP generally starts at minimum amounts of Rs.1000/per month and upper limit for using an ECS is Rs.25000/- per instruction. For instance, if one wishes to invest Rs.1, 00,000/- per month, then they need to do it on four different dates.
Advantages of SIP
Power of Compounding - The longer the period of your investment, the more wealth you accumulate because of the power of compounding. Thats why it makes sense to start investing early. Simply put, the incremental returns that you earned on your principal plus the accrued gains is compounding. Rupee Cost Averaging - Most investors want to buy stocks when the prices are low and sell them when the prices are high. But timing the market is time consuming and risky. A more successful investment strategy is to adopt this method called Rupee Cost Averaging. By investing in an SIP you end up buying more units when the price is low and fewer when the price is high. Convenience and Regularity - SIP gives you the convenience to pay through Axis Bank Electronic clearance service (ECS) or Auto Debit. You can decide the amount and the mutual fund scheme. A fixed amount will automatically get debited from your account on a date specified by you. Disciplined approach towards investment - Since you invest regularly, it makes you disciplined in your savings, which leads to wealth accumulation. Disciplined investing is vital to earning good returns over a longer time frame.
Disadvantages of SIP
Tax planning: Yes, setting up a SIP in a tax planning mutual fund will help you reduce taxes, but if you invest the same amount at one go in the same mutual fund you will get the same tax benefit. Tax benefit is not something exclusive to a SIP. SIP lead to building wealth: Good saving and investing habits are more likely to help you accumulate wealth in the long run, but there is no guarantee that you will end up doing so. Especially, if you invest in equity mutual funds. Ignore the spreadsheets: I came across more than a couple of websites that had examples of how a person could accumulate more units because of regular investing when compared with someone who buys in bulk. These calculations are just based on the assumptions the respective authors make, and there is no guarantee that you will accumulate more
units if you bought units regularly. A lot depends on market gyrations and nothing can be said with certainty.
Monthly investment
Rs 1,000
Rs 61,000
Rs 1,09,315
Return on investment
23.87%
Had you bought the units on March 13, 2000 at Rs 10.88 per unit (that was the NAV then), you would have lost because the NAV was just 7.04 on March 7, 2005. But because you spaced out your investment, you won.
In spite of the above drawbacks the retail investors' benefit in the long term horizon of 5-8 years is enormous. Only make sure that you can switch your funds from stock market to money market at short notice when the markets are really in a correction phase to safeguard the profits which you have made when the market was in a booming phase.
Example:
Consider the following example of two rational people who each invest the same amount of money into a managed fund over a period of time. Investor A decides to invest Rs. 10000 now. Investor B decides to invest by way of an SIP - Rs. 1000 each month. Investor A Units Investor B Units Month Unit Price (In Rs.) Purchased (In Rs.) Purchased 1 2 3 4 5 6 7 8 9 10 10000 0 0 0 0 0 0 0 0 0 1000 0 0 0 0 0 0 0 0 0 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 Rs. 10000 Rs. 11988 100.0 105.3 114.3 115.6 118.3 125.0 117.6 107.5 95.2 90.9 1089.8 10.0 9.5 8.8 8.7 8.5 8.0 8.5 9.3 10.5 11.0
a Systematic Investment. It shows that at the end of the investment period of 10 months Investor A who made an Lump sump investment has 1000 units in his portfolio has a market value of Rs. 11000. Whereas, Investor B who made investments through an SIP has 1090 units in his portfolio which has a market value of Rs. 11988.