Are you looking to finance your child’s future? Are you looking for saving money for your daughter’s wedding? Do you plan to buy a house 4-5 years down the line? Are you planning for your retirement? If your answer is yes to any of the above questions, then do you have enough bank balance to take care of all these? What if you do not have that kind of bank balance and still be able to pay for all these? With changing times, everything changes - be it lifestyle, needs, goals, priorities, etc. And so does the saving strategy. One of the saving strategies today is investing in Systematic Investment Plan (SIP).
What is SIP?
What is SIP?
A Systematic Investment Plan (SIP) is a convenient way to accumulate wealth in a disciplined manner over a long-term period. Here small sums of money are regularly invested, typically on a monthly or quarterly basis, over a long period. “SIP helps you to invest regularly in small instalments and thereby build wealth over a period of time. It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund,” explains Vikaas M Sachdeva, Country Head – Business Development, Bharti AXA Investment.
Who should invest?
Who should invest?
So is there any specification on who should invest and who should not? “Risk-averse investors who can invest a regular fix amount monthly (or quarterly) with a long term (generally 3 to 5 yrs.) horizon, can opt for SIP mode of investment,” observes Rajesh Kumar Gupta, a Certified Financial Planner. SIPs are supposed to take care of the volatility of the stock market and give steady profits to the investors in the long term. With an SIP you can invest in the stock market without being worried about its movements. Also, you can invest a small fixed amount, say Rs 1,000 a month, in a SIP.
How much should one invest?
As not everyone’s requirements are same, the savings and investment will also vary. “The amount to invest in SIP depends on the investment objective, risk appetite and time horizon of each investor”, says Sachdeva, and further adds, “Depending on what one wants to save for, and how long he/she can save, the investor may choose the scheme which provides a solution to his individual needs. The determining factors could be as varied as fund performance, fund management style or any other.”
Any kind of investment is done with an estimate of the return that investment will provide. And so, depending on how much return is required to fulfill the objective of investment, determining the amount of your investment would not be that difficult. Explaining the method, Gupta says, ”We can do forward and backward calculation to get an approximate idea of investment amount. Forward calculation means if we invest Rs 10,000 per month for next 10 years in a diversified equity fund with a return expectation of 12 per cent CAGR, then we can expect an amount of Rs 23 lakh after 10 years and in backward calculation, suppose we need Rs 40 lakh after 10 years. then how much to invest monthly? The answer is Rs 17,500 @ 12 per cent CAGR.”
Which is the good time to start?
Which is the good time to start?
When it comes to SIP, any time is good time to invest. Irrespective of the market movements, being a long term investor, you will tend to gain on your regular investments. Let’s take an example: A started investing at the worst phase of stock markets (February 2000) and the amount invested was Rs 1,000 per month in a composite fund (consisting of the 10 largest open-ended equity funds with 10-year-plus track records) till September 2008 (See Graph: ‘Beating Market Volatility’). The annualised return work out to 29 per cent even after starting out just before the market crashed! This is just an example of how one can benefit from SIP even during the worst phase of the market. Therefore, it really does not matter when you start investing, provided it is for the long term.
The Pitfalls
The Pitfalls
Of course, since SIPs invest in the market, there are pitfalls too. Elaborating on these pitfalls Gupta says, “In the rising market, you accumulate lower number of units hence a security risk is involved. In downward trend, though you get higher number of units but overall investments if dissolved may not give profit. Short term investors may not be benefitted due to the uncertainty of the equity market. Gupta gives a concrete example of HDFC Top 200 Fund to explain the nature of risk involved. Taking the real data of this fund for a period of 1 Aug. 2007 to 2 Aug. 2010 and assuming a monthly investment of Rs 10,000, Gupta compares investment by a short-term investor for 12 months and a long-term investor’s investment for 36 months (See Tables: ‘Investment in SIP of HDFC Top 200 Fund’ and ‘HDFC Top 200 Fund SIP Returns for 12 & 26 Months’). “The table clearly shows that narrow horizon has given negative return which means he has lost a part of his capital also and broader horizon has given much better return than any other investment alternative like banks and post office products,” observes
Gupta, adding further, “In the same scenario, even if the investor had paid only 12 SIPs and got 859.74 units but kept these invested till 02 Aug. 2010, then his account value would have been Rs 1,73,424.96 @ Rs 201.72, definitely a positive return.”
Termination/Redemption of SIP
The investor decides the time period for SIP but it can be terminated or discontinued at any time before tenure after notifying the AMC. The AMC will charge an exit load for the same. In respect of redemption, the SIP will not stop unless requested by the investor. This is not available for SIP instalments of ELSS (Equity Linked Savings Scheme) funds or tax-saving funds, which have a lock-in period of three years. “At any given point of time the investor has the option of changing (increasing or decreasing) their SIP amount and time period after completion of necessary paperwork with the AMC,” informs Sachdeva.
Things To Watch Out
Things To Watch Out
Usually, a fund will charge 2.25 per cent of invested amount as the ‘entry load’. However, in some cases this amount may be less. Keep track of contribution after taking into account the cash flows available. Make sure of any incremental transaction charges attached to each investment. Especially in case of auto-debit, you may be charged a fee for every transaction. In case you invest in a daily SIP, you need to remain invested for at least three years to avail the benefits, and monitoring this on a daily basis can be bothersome. You can also speak to a certified financial planner before putting in your money in any investment. There can be some clauses which normally one tends to discount or overlook. In such cases, to avoid any kind of financial hassle it’s always better to take a professional advice.
Despite few concerns, it would not be wrong to state that SIP is the best investment option for a long term investor. This in particular provides a comfort zone to a first time investor in stock market. If you are the kind who would like to stay away from the stress that equity market provides, then you should secure your investments through SIP.
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Source : DSIJ
