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Showing posts with label Mutual Fund SIP. Show all posts
Showing posts with label Mutual Fund SIP. Show all posts

Saturday, September 3, 2011

SIP - A Boon for Small Investors

SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a mutual fund by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in mutual fund. Thus, you can invest in a mutual fund without altering your other financial liabilities. 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 appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years.

Even for the cash-rich, SIPs reduces the chance of investing at the wrong time and losing their sleep over a wrong investment decision. However, the true benefit of an SIP is derived by investing at lower levels. Other benefits include:

1. Discipline

The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundreds every month, rather than set aside a large sum for investing in one shot.

2. Power of compounding

Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. Let’s explain this with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a corpus of Rs 12.23 lakh while person B’s corpus was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-corpus. That difference is due to the effect of compounding. The longer the (compounding) period, the higher the returns.

Now, instead of investing Rs 10,000 each year, suppose A invested Rs 50,000 after every five years, starting at the age of 35. The total amount invested, thus remains the same - Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.

3. Rupee cost averaging

This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.

People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.

4. Convenience

This is a very convenient way of investing. One of the way is to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one’s account and will send the confirmation for the same. The most convinient option is to start SIP via your online trading account like ICICI direct, HDFC Securities, Sharekhan, India Infoline, Motilal Oswal etc. You simply select the mutual fund house and the scheme in which you want to start SIP, enter the investing amount, frequency (fortnightly, monthly or quaterly) and time period. Amount will get debited through ECS (electronic clearing service) based on the specified parameters defined by you.   

5. Other advantages

There are no entry or exit loads on SIP investments. Capital gains, wherever applicable, are taxed on a first-in, first-out basis.

Monthly investment of a fixed amount brings in discipline into your fiscal behaviour. Since the amount gets deducted from your bank account automatically, you do not even realise it. This inculcates a savings habit, forces you to save and brings in a regularity in your investment pattern and helps you in reaching financial goals in a painless manner.

Saturday, October 9, 2010

4 Good Reasons For Investing Through SIPs

Below are the 4 good reasons for investing regularly through SIPs:

1. Light on the wallet

Given that the average annual per capita income of an Indian citizen is approximately only Rs. 25,000 (i.e. monthly income of Rs 2,083), a Rs 5,000 one-time entry in a mutual fund may still appear high (2.4 times the monthly income!). And, mutual funds were never meant to be elitist; far from it, in fact the retail investor is as much a part of the mutual fund target audience as the next high net worth investor (HNI). So, if an investor cannot invest Rs 5,000 in one shot, that's not a huge stumbling block, the investor can simply take the SIP route and trigger the mutual fund investment with as low as Rs 250 per month.

2. Makes market timing irrelevant

If market lows give you the jitters and make you wish you had never invested in equity, then SIPs can help. Plenty of retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations.

But, that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, even property) over the long-term (at least 5 years) as also to effectively counter inflation. So, if stocks are such a great thing, why are so many investors complaining? It's because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record.

3. Power of Compounding

The early bird gets the worm is not just jungle folklore. The same stands true for the 'early' investor, who gets the lion's share of the investment booty vis-à-vis the investor who comes in later (see table below). This is mainly due to a thumb rule of finance called 'compounding'.


So as we see, Ram starts at age 25, and invests Rs. 7,000 per month until retirement (age 60). His corpus at retirement is approximately Rs. 2.65 crore. Mohan starts at age 30, a mere 5 years after Ram, and invests the same amount until retirement (also at age 60). His corpus comes to approximately Rs. 1.58 crore, note the difference between the 2 corpuses here.

And lastly, we have Kunal, the latest bloomer of the lot. He begins investing at age 35, the same amount monthly as Ram and Mohan, and invests up to his retirement (also at age 60). His corpus is, in comparison, a meagre Rs. 92 lakhs.

So the earlier you begin your SIPs, the better returns you get. This is simply because of compounding returns your investments will receive over more no. of years.

4. Lowers the average cost

SIPs work better as opposed to one-time investing. This is because of rupee-cost averaging. Under rupee-cost averaging, an investor typically buys more of a mutual fund unit when prices are low.

On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors who kept their SIPs going while the Sensex fell from 21,000 to 8,000 in 2008 and sitting on some significant profits now, because they kept up their investing discipline.

The above table explains the absolute returns generated by SIPs in the respective time frame. For investment in some large cap funds, SIPs on an average have delivered absolute returns of 53.2%, 35.0% and 20.2% over 1-yr, 2-yr and 3-yr periods.