For Investment purpose, we often wait to collect a large amount of money and invest it all at once. These investments are done to achieve our future goals like buying a house, child’s education, marriage or retirement planning. However recurring household expenses always erode the money which we would have otherwise kept for investments and the result – we end up compromising on our financial goals. Systematic Investment Plan (SIP) is a financial planning tool that allows you to invest in mutual funds through small, periodic installments. Moreover you can also select the tenure of your investments. SIPs help you set aside a fixed amount every month for investments thus contributing towards your financial goals.
ADVANTAGES OF SIP
Through an SIP, an investor pledges to invest a fixed amount of money on a monthly basis in a mutual fund scheme for a predetermined time period. Also SIP provides the investor with the flexibility to increase the amount of his monthly installment at any time.
Investments do not necessarily mean that one has to collect a substantial chunk of money to invest. One can start investing with a very small amount through an SIP.
Easy to Invest
When we think monthly installments, we generally think of one more date to remember apart from the bill payment dates. That is not the case with an SIP. You have the convenience of direct debit of your SIP installments through Electronic Clearing Service (ECS) facility. Your SIP amount automatically gets debited from your bank account on the predetermined date.
Helps in Compounding Your Wealth
Getting rich is simpler than you think, here’s a simple formula to get rich:
Start Early + Invest Regularly = Create Wealth
Systematic investing has a compounding effect on your investments. In the long term, an investment as low as Rs 5000/- per month swells up into a huge corpus. This can be best explained by the following graph. The graph shows advantages of starting early. If an investor starts early, even with lower invested amount he can create a large corpus.
HAVE INVESTORS MADE MONEY THROUGH MUTUAL FUNDS SIP IN RECENT PAST ?
Participating in equity market through SIP (Systematic InvestmentPlan) in diversified equity funds is the most recommended investment for retail investors. Range bound market of last 3 years and negative sentiment have tested investors’ patience & majority of investors’ have perceived skepticism about effectiveness of SIP investment through mutual funds. We have always recommended SIP investment with the objective of meeting financial goals like kids higher education, marriage and planning for retirement. In short, for goals which typically have more than 5 years of horizon. This investment horizon typically allows to invest through different market cycles and to take maximum advantage of rupee cost averaging. If we look at SENSEX movement of last 5 years since Jan 2008,when it touched 21000 level for the first time, you may argue that even after 5 years SENSEX is trading in negative territory. But remember that during this period SENSEX has witnessed high volatility from high of 21000 in Jan 2008 to low of 9000 in March 09 only to regain 20000 level again in Nov 2010 and falling back to 15500 level in Dec 2011 and now rising again to 19000 level. This volatile period has worked in best interest of those investors who continued investing through SIP in this entire period because falling market of 2008 provided best opportunity to SIP investor to accumulate more units with falling NAV. As market falls SIP investors benefit as same amount of investment can get more units at lower NAV. So when market turned from around 9000 level in March 09 and again from around 15500 level in Dec 2011, investors who have continued their SIP during this entire period have benefited the most. Same can be justified from SIP return of Mutual Fund schemes across various time period. As can be seen from below table, average SIP return in last one year has remained in range of around 23 – 24% compared to 21-22% return generated by benchmark index. In last 5 years average SIP return has remained at around 11% compared to 7% benchmark return. For 10 year & 15 year period, return goes as high as around 18 to 20% CAGR and that too tax free return compared to around 13-14% return generated by benchmark indices. As you can see, as investment horizon increases, equity funds outperform benchmarks by wide margins. So across time horizon SIP return has not only outperformed index return but also generated inflation beating return. Even when you consider last 5 years return when SENSEX has broadly remained range bound and still trading below its January 2008 level, those investors who patiently continued investing in SIP are sitting on 11% return.
We strongly believe that SIP investment in diversified equity funds is the best tool for retail investor to participate in equity market and take advantage of equity market volatility. For a short period of 2 to 3 years SIP investment may underperform but always remember that investors who patiently keep investing in down market benefit the most when tide turns and market starts moving up. History shows that in the long run, SIP in equity funds have generated inflation/market beating return which has helped investors to achieve all their long term financial goals and we see no reason why history should not get repeated. So we strongly believe that as an investor you should look at your achievement of your long term financial goals rather than focusing on short term movement and continue with your SIP investment towards your goal, as focus on final destination is more important than minor hiccups which we face on our journey to destination.
The table below shows that in long run most of the funds create wealth and perform better than NIFTY.
Systematic Investment Performance Tracker (Investment of Rs. 10,000 per month)
|Tenure (As on 30 Sep 2013)||5 Years||7 Years||10 Years||12 Years|
|Reliance Growth Fund Gr||6,65,384||9,91,969||23,57,119||60,63,980|
|SBI Magnum Tax Gain Fund - Div||7,19,671||10,29,773||24,03,449||56,32,913|
|SBI Magnum Global Fund 94 - Div||8,07,548||11,26,048||25,58,525||56,46,605|
|HDFC Top 200 Fund - Div||7,10,931||11,02,113||24,80,519||53,58,383|
|ICICI Prudential Exports and Other Services Fund - Gr||9,38,556||12,82,067||NA||NA|
|ICICI Prudential Discovery Fund Gr||8,45,554||13,04,821||NA||NA|
|NSE 50 (NIFTY)||7,10,009||10,21,225||19,87,368||32,85,644|