Systematic Investment Planning:
Systematic is the word that describes you. Organised, well-managed and planned in all your activities. Whether it is earning, saving or spending, everything is done in a methodical manner. Well… err… except for investing. But then you are not to blame. You never had enough money. Or, sometimes it was shortage of time. If this is the case, then its time you had a look at the systematic investment plan (SIP) of mutual funds. A SIP is nothing but a planned investment programme, which takes a small sum of money from you and invests it in a mutual fund at regular intervals. The minimum amount can be as small as Rs 500 and the frequency of investment is usually monthly or quarterly. This simple programme has a number of advantages.
First, if saving is an arduous task for you, then SIP can do this for you. Money deducted from your account (through post-dated cheques) and invested is money you cannot spend. And a rupee saved is a rupee earned. Even if each investment is small, over time this can add up to a neat kitty. And the power of compounding can do wonders. In due course of time, a small amount can grow into a significant amount. More importantly, an SIP does away with the need or effort to time the market. When the market is falling you may feel that it may decline further and that you should wait a while. Often stock markets make a recovery before you notice and the opportunity is lost. When markets are rising it is scary to invest money. Isnt it better that you wait for a correction and then make an investment? But if the correction doesnt come about, then even this opportunity is missed. And if markets are going nowhere, then what is the point in investing at all?
So, trying to find out which is the best time to invest can be a tough task. And thats why it is said that timing the market is futile. If one could take advantage of the ups and downs that markets encounter, it would be great. And this is where SIP fits in. By the process of regular investing one gets to invest in the highs as well as the lows, and this helps in averaging out the volatility in the market.
Some mutual funds suggest that contribution to an SIP programme should be increased in a full-fledged bear market. While this may be emotionally difficult, it can be rewarding when markets recover. But then this appears very much like timing the market and the purpose of an SIP is to avoid this effort.
Thus, an SIP imparts discipline to investing. Whether it is the regular act of saving or investing, an SIP does both automatically. While there are certain benefits of an SIP please remember it is no wonder drug that cures all investment-related ailments.
An SIP does not guarantee returns or positive returns. If you opt for an SIP in a falling market and the market continues to fall, then your investments will suffer a loss on the whole. An SIP does not guarantee a better return than a one-time investment. If you made a one-time investment when the Sensex was at 2,834 points in October 2002, then this would have performed better as compared to carrying out an SIP by spreading the investment over a period of time.
The emphasis on averaging out in an SIP obviously makes it most useful in case of an equity fund, as the volatility is greater here. An SIP can be useful for a debt fund as well...to help build a pool of savings. It can be thought of something akin to a recurring deposit where a part of your savings is automatically deducted from your account.
Overall, an SIP is a simple device that helps you to save and invest in a disciplined manner without having to time the market.
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Source : ET
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LONG TERM INVESTMENT THROUGH SIP OF MUTUAL FUND:
You have heard many times the term SIP. What is SIP of a Mutual fund?
SIP is actually a Systematic Investment Plan of investing in Mutual Fund. It is specially designed for those who aim to build wealth over a long period and want a better future for him and their dependants.
The investment in a Mutual fund can be done in two ways. First way is one time payment i.e. making payment to a fund at once and gets the units of the fund as per the Net Asset Value (NAV) of the fund on that day.
A person wishes to invest in a fund Rs. 24,000/- . On the day of Investment, the NAV of the fund was Rs. 10/-. He gets 2400 units @ Rs. 10/- per unit.
The other way of investment is making payment to the fund periodically, which is termed as Mutual Fund SIP. When you commit to invest a fixed amount monthly in a fund, it is called as Systematic Investment.
It is actually beneficial for those investors who wish to invest a large amount in a fund and wishes to create a large chunk of wealth for long term but due to financial constraints are able to do so.
The SIP provides them a way to invest in the fund of their choice in installments.
Eg. A person wishes to invest Rs. 24000/- in a fund but due to other obligations, it is not possible for him to invest such an amount in a fund. He takes the SIP route and contributes to the fund Rs. 2000/- monthly for a year. At the end of the year, hell have invested Rs. 24,000/- in the fund. When the NAV is high, he will get the fewer units and when the NAV is low, hell get the more units. So, hell get the benefit of averaging through the SIP route.
The NAV in the first month was Rs. 10/-, hell get 200 units in the first month
The NAV in the second month was Rs. 9.50/-, hell get 210.52 units in second month
The NAV for the following month was Rs. 10, hell get 200 units in the next month
So, at the end of the year he may get more units as compared to the units hell get through single investment.
Benefits of SIP
1. SIP can be started with a minimum investment of Rs. 500/- per month or Rs. 1000/- per month.
2. It is good and effective way of creating wealth for long term.
3. ECS facility is available in case of Investment through SIP.
4. A small withdrawal from the account doesnt affect the bank balance of an individual as compared to a hefty withdrawal.
5. It can be for a year, two years, three years etc. if a person at any point of time couldnt be able to continue its SIP, he may give instructions atleast 25 days before to the fund house. His SIP be discontinued.
6. All type of funds except Liquid funds, cash funds and other funds who invest in very short fixed return investments offers the facility of SIP.
7. Capital gains, if applicable, are taxed on a first-in first-out basis.
8. As the investment made through SIP are not at one time. Some units bought at high price and some at low price, so chances of making gain through SIP is higher than the one time investment.
In short, SIP is a simple and effective way to create wealth but to create such wealth, one should think about the investment in SIP for a period of atleast for time frame of three years because it pays to invest in a longer run.
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Wouldnt you pity someone who invested in the Taurus Discovery Fund 10 years ago? It has been the worst-performing equity fund since January 2001, moving lethargically when other equity funds have whizzed past and created wealth for investors. Well, save your pity for those who chose not to invest in equities 10 years ago.
Despite being the worst-performing equity fund in the past 10 years, Taurus Discovery has churned out 8.99% returns, which is higher than what a debt instrument would have earned during the same period.
The difference becomes stark when we look at SIP returns. The 10-year SIP returns of Taurus Discovery areover 15% (see table), much higher than what a debt instrument can offer. We looked at 10-year SIP returns of equity funds during different time frames and found that except for one instance, even the worst-performing equity fund had given significantly higher returns than monthly investments in debt options (fixed deposits, NSCs, PPF).
Most investors already know that in the long term, equities have the potential to churn out the best returns among all asset classes. But many dont realise that in the long run, SIP investments work best for them. “SIPs are an excellent tool for investors starting off in the age group 21-35 years as that is a wealth creation period,” says Partha Iyengar, founder, Accretus Solutions. During the early phase, individuals do not have too much to invest.
For them, SIP is the best way to build an equity portfolio. Reliance Growth has given the highest SIP returns in the past 10 years. A monthly investment of Rs 1,000 started in January 2001 is now worth Rs 13.15 lakh, an annualised return of 38.17%. To see how SIPs work over different market cycles, we also looked at 10-year SIP returns at the end of 2008 and 2009. The results were not surprising. SIPs do work across market cycles as well, which means that a systematic investor need not worry about missing the bus or catching the tide.
SIP is an all-time product. It scores over a lump-sum investment since you invest irrespective of the market condition,” says Sankaran Naren, Chief Investment Officer, Equities, ICICI Prudential Mutual Fund.
In other words, you can never go wrong while investing in equities if the method you choose is right. As our research shows, long-term SIP returns of equity funds have always been higher than those of debt instruments. This may not have been possible if the investments were made in lump sum.
What is important, however, is to keep an SIP running over the long term and especially during downturns. There is no point in running an SIP for only a year or stopping it when the market tanks. “We recommend investors to do SIPs in diversified equity funds for long periods of time, typically more than five years,” says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.
Another mistake which most small investors make is close their SIPs when markets fall. “Stopping SIPs in bad market conditions defeats the very purpose of systematic investing,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services.
SIPs have evolved significantly since they were first introduced by mutual fund houses more than a decade ago. Now you can have SIPs in different intervals (daily, monthly, fortnightly or quarterly). The minimum amount of the SIP has also come down to Rs 500. But one basic feature of the SIP remains unchanged: For the small investor, it remains the best way to invest in equities for the long term.
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source: ET
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10 myths about Systematic Investment Plans:
What is a Systematic Investment Plan (SIP)?
SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular saving schemes like a recurring deposit.
An SIP allows you to buy units on a given date each month, so that you can implement an investment / saving plan for yourself. Once you have decided on the amount you want to invest every month and the mutual fund scheme in which you want to invest, you can either give post-dated cheques or ECS instruction, and the investment will be made regularly. SIPs generally start at minimum amounts of Rs 1,000 per month and the upper limit for using an ECS is Rs 25000 per instruction. Therefore, if you wish to invest Rs 100,000 per month, you may need to do it on 4 different dates.
As is customary, I started with describing the concept of an SIP.
Let us break some myths on SIP now.
Investment in equity mutual funds or unit linked insurance should always be done in SIP mode:
I remember in 1999 when Templeton Mutual fund would talk about SIP – the market looked at it skeptically. And it took a lot of convincing for customers to accept it. Now, life has come a full circle. Everybody wants to (always) invest using an SIP. If you have the maturity and calmness to realize that equities are for the long term and are willing to give your funds about 10 years, and you have a lump sum, you can afford to give the SIP route a pass. However, if your horizon is less than five years, you must do an SIP.
I do rupee cost averaging in a single equity – that is a kind of SIP is it not?
This is a question I face every day. No, a rupee cost averaging in a single scrip cannot be equated to an SIP. When the market brings down the price of a single scrip, it is giving you information. You need to react to that.
Let us take 2 examples – Lupin Laboratories – has moved from a high of Rs 700 to Rs 100 and back to Rs 700. The question to ask here is not whether an SIP would have worked. The question to ask is whether you would have had the stomach to continue the SIP through this period. Silverline Technologies moved from Rs 30 to Rs 1300 to Rs 14! In this case, if you had started an SIP at a price of Rs 1300, today you would be licking your wounds. SIP works in a portfolio, not in a single scrip.
You cannot invest a lump sum in the same account in which you are doing an SIP:
Many people assume that if they are doing an SIP in a particular fund, and suddenly they have a surplus, they cannot put that lump sum in that account. Fact is, in case you are doing an SIP of Rs 10,000 per month in an equity fund, and suddenly you have a surplus of Rs 100,000 and clearly you have a 10-year view on the same, then you can just push it into your SIP account. SIP is just a payment mode, not a scheme!
If I miss investing for a particular month, will they prosecute me?
Now, this is the fear of EMI that people have. In an SIP you are buying an investment every month (or quarter), there is no question of prosecuting you for missing one investment. As a matter of discipline, you should not miss any month; however, missing one months investment is not a crime!
When you have a surplus (accumulation stage of your life) you should do an SIP and during retirement you should do a Systematic Withdrawal Plan (SWP):
No. You should ideally keep your withdrawals only from an income fund or a bank fixed deposit. You should sell an equity fund on some other basis, say deciding to sell 20% of your portfolio in a year so that the return is 4 times the 30 year historic return. SWP, by definition cannot work in an equity fund!
SIP works for everybody, but does not work for me:
Another myth. SIP works in a well-diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a good fund or are looking at a 12 month horizon.
SIP is only for small investors:
Nothing can be farther from the truth. I have a client who has invested Rs 32.66 lakhs using SIP, starting from January 1998 till date. Obviously, he has invested much more in later years as his income went up and the funds together are worth Rs 97 lakhs, substantially higher than his provident fund.
Market is at very high level to start an SIP:
I have heard this when the index was 3000 also. I have no clue where the market is headed, but I know SIP works!
All fund houses are now charging a full load on the SIP, so now SIP will not work Why not time the market?
Introducing an entry load was expected to happen and it has happened. What actually hurts the retail investor is the asset management charges – 2.5% in most cases is a bigger threat to compounding!
If I do an SIP in a tax plan, can I withdraw all the money on completion of 3 years?
Another regular question almost! Every installment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules, which say that a tax saving scheme should have a 3-year lock-in. You cannot escape that by doing an SIP!
The author, PV Subramanyam, is a financial domain trainer.
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Source : moneycontrol
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