CHAPTER 7 Systematic Investment Plan (SIP) 7.1 Basic information 7.2 Significance of SIP 7.3 SIP calculator 7.4 Comparative Analysis of Systematic Investment Plan and Lump Sum Investment 119 P a g e
Introduction Chapter 7 Systematic Investment Plan (SIP) The Systematic Investment Plan (SIP) is a simple and time honored investment strategy for accumulation of wealth in a disciplined manner over long term period. The plan aims at a better future for its investors as an SIP investor gets good rate of returns compared to a one time investor. 7.1 Basic Information What is Systematic Investment Plan? 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. 120 P a g e
For instance, if one wishes to invest Rs. 1,00,000/- per month, then they need to do it on four different dates. SIP INVESTORS It is easy to become a systematic investor. One need to plan the saving effectively and set aside some amount of money every month for investment purposes in a fund that is ideally a diversified equity fund or balanced fund. Post dated cheques can be given to the fund house. The investor is at liberty to exit from the scheme depending on the market conditions. 7.2 Significance of systematic investment plan Power of compounding: The power of compounding underlines the essence of making money work if only invested at an early age. The longer one delays in investing, the greater the financial burden to meet desired goals. Saving a small sum of money regularly at an early age makes money work with greater power of compounding with significant impact on wealth accumulation. Rupee cost averaging: Timing the market consistency is a difficult task. Rupee cost averaging is an automatic market timing mechanism that eliminates the need to time one's investments. Here one need not worry about where share prices or interest are headed as investment of a regular sum is done at regular intervals; with fewer units being bought in a declining market and more units in a rising market. Although SIP does not guarantee profit, it can go a long way in minimizing the effects of investing in volatile markets. Convenience: SIP can be operated by simply providing post dated cheques with the completed enrolment form or give ECS instructions. The cheques can be banked on the specified dates and the units credited into the investor's account. The SIP facility is available in the Principal Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, Growth Fund, Equity fund and Tax Savings Fund. 121 P a g e
SIP features Disciplined investing is vital to earning good returns over a longer time frame. Investors are saved the bother of identifying the ideal entry and exit points from volatile markets. SIP options such as equity, debt and balanced schemes offer a range of investment plans. While there is no entry load on SIP, investors face an exit load if the units are redeemed within a stipulated time frame. The success of your SIP hinges on the performance of your selected scheme. How do SIP scores It makes you disciplined in your savings. Every month you are forced to keep aside a fixed amount. This could either be debited directly from your account or you could give the mutual fund post-dated cheques. As you see above, it helps you make money over the long term. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time. So you tide over all the ups and downs of the market without any drastic losses. Also, a number of mutual funds do not charge an entry load if you opt for a SIP. This fee is a percentage of the amount you are investing. And if you do not exit (sell your units) within a year of buying the units, you do not have to pay an exit load (same as an entry load, except this is charged when you sell your units). If, however, you do sell your units within a year, you would be charged an exit load. So it pays to stay invested for the long-run. The best way to enter a mutual fund is via an SIP. But to get the benefit of an SIP, think of at least a three-year time frame when you won't touch your money. Of course you would lose money if your units lost value over time. What most SIP Mutual funds don't tell you is that they recover their fees as monthly charges by selling your units, so while you are buying more units when the market is down, more of your units are also being sold to fund the monthly charges of the Mutual fund. Also the Bid and Offer of 122 P a g e
the Mutual Fund is around 7% and this is the front load or expense you pay for buying the units each month. Also sometimes the Mutual fund will have annual fee charges. 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. 7.3 SIP CALCULATOR What will be the value of your investment if you have invested 10,000/- every month through SIP? Tenor of Of SIP Rate Return 8 % 12 % 15 % 5 749,667 834,863 906,819 10 1,851,657 2,333,391 2,796,573 15 3,493,451 5,055,760 6,778,631 20 5,939,472 10,001,479 15,169,550 *With monthly compounding 1600000000% 1400000000% 1200000000% 1000000000% 800000000% 600000000% 400000000% Series1 Series2 Series3 200000000% 0% rate of return tenor of SIP 5 10 15 20 123 P a g e
Here, it is clear that investing n starting early through SIP is beneficial for an investor. 7.4 Comparative Analysis of Systematic Investment Plan and Lump Sum Investment SIP and Lump sum are the two techniques to invest in mutual funds. Any investor can choose one out of them and can invest their money into mutual funds. SIP is Systematic Investment Plan which is very helpful to salaried and middle class man. They can invest their saving into Systematic Investment Plan and can collect huge funds for future. Other than SIP Lump sum investment requires an investor to invest only one time but that is a huge amount and involves lot of risk. SIP is paid in monthly or quarterly as per the scheme. But lump sum is paid only one time and the whole transaction is based on this investing money. Opting SIP, an investor can invest their saving into it and can safe his money doing that. SIP is good because if it seems that market will goes down in few days so an investor can safely withdraw his money and can safe his money. An investor who is planning to make investment should go through a proper study before investing, considering his goals and requirements he should choose between SIP and Lump sum. We can study and compare between these two way of investing through an example where Mr. A prefers SIP where as Mr. B invest through one time investing. Comparison between SIP v/s one time investing Mr. A s SIP investment Mr. B s one time investment Months Amount invested Sales price No. of units purchased Amount invested Sales price No. of units purchase Jan 1 st 3000 8.50 352.90 36000 8.50 4235.30 Feb 1 st 3000 9.50 315.80 Mar 1 st 3000 9.00 333.30 124 P a g e
April 1 st 3000 8.60 348.80 May 1 st 3000 8.00 375.00 June 1 st 3000 8.80 340.90 July 1 st 3000 9.10 329.70 Aug 1 st 3000 8.20 365.90 Sep 1 st 3000 7.40 405.40 Oct 1 st 3000 6.60 454.50 Nov 1 st 3000 6.90 434.80 Dec 1 st 3000 9.20 326.10 TOTAL 36000 4283.20 4235.30 The figures of Sale Price used are hypothetical and are for illustrative purposes only Here we can easily and clearly see that Mr. A is in more benefit as he is investing 36000 and return which he receives is more than that of Mr. B. also, Mr. A can have his money in his hand till last installment. Mr. A's SIP Investment would have accumulated to approximately 4,383.20 units, where as B's lump sum investment would have acquired only 4,235.30 units 125 P a g e