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Wealth creation is not easy. But neither it is difficult for wise and disciplined investors.
One product that can really help investors in wealth
creation is a mutual fund Systematic Investment Plan (SIP).
The SIP is a simple and time honored investment strategy for accumulation of wealth in a disciplined
manner over long term period. This article takes a closer look at this very important and ideal tool
for wealth creation for investors.
What is SIP?
The SIP is not a type of a mutual fund (MF) scheme. It is a way of
investing in a mutual fund scheme. One can invest in a scheme by paying a Lump-sum amount or by
making a Switch from an existing scheme or by doing a SIP, if available.
SIP is a very popular and an ideal way to invest as it leads to disciplined and regular investment
for investors. It is just like a recurring deposit. Under a SIP, a specific amount, called as SIP
Amount, is invested at regular interval of time, continuously for a certain period. Thus, for
example, an investor may choose do an SIP of Rs.1,000/- every month for the next 5 years in a
particular mutual fund scheme. Most of the schemes even offer the multiple choices of SIP date in a
month to the investor.
Benefits of SIP:
Automatic Timing & Lower average cost of units:
One of very important
benefits of SIP is that it does automatic timing of the markets. Under an SIP you will be investing
a fixed amount every period, irrespective of whether the market is high or low. Thus, when markets
are high, you would automatically buy lower number of scheme units and similarly when markets are
low, you will be purchasing more number of scheme units. Thus, the SIP investors do not need to
regularly track or worry about market movements. Further still, the average cost of one unit tends
to be lower over time. benefit is also commonly known as "Rupee Cost Averaging'.
Illustration - Rupee Cost Averaging:
Say you have opted for an SIP in a
diversified equity MF Scheme, investing Rs. 1000 every month from March 2010 to Feb 2011. Now if we
check the average purchase cost per unit of your investments. It would be lower than the average NAV
of your investment over 12 months.
| Date |
Amount (Rs.) |
NAV (Rs.) |
Units (nos.) |
| 1 |
10/3/2010 |
1,000 |
100 |
10.00 |
| 2 |
10/4/2010 |
1,000 |
115 |
8.70 |
| 3 |
10/5/2010 |
1,000 |
125 |
8.00 |
| 4 |
10/6/2010 |
1,000 |
130 |
7.69 |
| 5 |
10/7/2010 |
1,000 |
132 |
7.58 |
| 6 |
10/8/2010 |
1,000 |
145 |
6.90 |
| 7 |
10/9/2010 |
1,000 |
150 |
6.67 |
| 8 |
10/10/2010 |
1,000 |
139 |
7.19 |
| 9 |
10/11/2010 |
1,000 |
165 |
6.06 |
| 10 |
10/12/2010 |
1,000 |
172 |
5.81 |
| 11 |
10/1/2011 |
1,000 |
182 |
5.49 |
| 12 |
10/2/2011 |
1,000 |
175 |
5.71 |
| 12,000 |
1,730 |
85.80 |
Note: The table considers a hypothetical NAV trend to explain the concept of Rupee Cost Averaging.
The NAV do not in any manner indicate the past or future NAVs of any scheme.
Average Cost = Total Cash Outflow / Total Number of units = Rs. 12000/ 85.80
= Rs.139.85
Average Price = Sum of all NAVs at
which you have invested/ Number of months of investment = Rs. 1730/12
= Rs.144.17
Average Cost of Units
Disciplined Savings:
Disciplined investing is an important characteristic to
create wealth over a longer period of time. Often, investors plan to save in lump sum in some
product and many are times such investments are delayed or do not materialize. SIP, with its
disciplined way of investing, makes sure that you are saving money at regular intervals. Even small
money, invested regularly, for a long period can go very long way in creating wealth. Think of each
SIP payment as laying a brick. One by one, you will see them transform into a building.
Power of Compounding:
The famous scientist Albert Einstein called the
“Power of Compounding” as the Eighth Wonder of the World. In simply means that the
longer you invest, the returns will increase at a greater pace. Thus, the longer the SIP, the better
the power of compounding will work for you and hence better chances for creation of significant
wealth. Historically, SIPs have delivered good returns. The average returns for diversified equity
MF scheme SIP and the power of compounding can be very clearly seen from the following table:
SIP Amount: Rs.10,000*
(Starting
February month) |
Period completed – January 2011 |
| 3 years |
5 years |
7 years |
10 years |
12 years |
| Average Returns every year of BSE Sensex |
15.99% |
10.84% |
15.81% |
19.62% |
17.28% |
| Average Returns every year of Diversified Equity MF Schemes |
19.72% |
13.33% |
17.91% |
25.58% |
23.31% |
| Actual Amount Invested |
360,000 |
600,000 |
840,000 |
12,00,000 |
14,40,000 |
| Average Current Wealth / Investment Value for MF SIP |
480,143 |
840,601 |
16,00,189 |
47,83,429 |
68,53,177 |
| MF Scheme universe |
37 |
33 |
16 |
8 |
7 |
Actual data as on 31st January, 2011. Source: Internal. Past Performance may or may not be repeated
in future. Returns are market dependent and are not guaranteed.
Planning for Financial Goals:
Due to its benefits of disciplined savings and
attractive returns potential in long term, SIP can be very effectively used for planning your life
and financial goals. Think of starting a SIP for your son's education or daughter's marriage or
retirement. Your financial goals in life can become realistic if proper planning and use of SIP is
done for same. The idea is to match the SIP period with that of the years remaining for any goal.
Doing this can really help one plan out for financial goals smartly, even with small amounts of
regular investment. This can be seen from the following example:
| SIP Period > |
5 |
10 |
15 |
20 |
25 |
30 |
| Yearly Return |
End Value for a monthly SIP of Rs. 500/-
|
| 10% |
38,586 |
100,729 |
200,811 |
361,993 |
621,580 |
1,039,646 |
| 12% |
40,552 |
112,018 |
237,966 |
459,929 |
851,103 |
1,540,487 |
| 15% |
43,671 |
131,509 |
308,183 |
663,537 |
1,378,280 |
2,815,885 |
| 20% |
49,352 |
172,156 |
477,730 |
1,238,097 |
3,130,133 |
7,838,126 |
| Investment |
30,000 |
60,000 |
90,000 |
120,000 |
150,000 |
180,000 |
| Yearly Return |
End Value for a monthly SIP of Rs. 1,000/-
|
| 10% |
77,172 |
201,458 |
401,621 |
723,987 |
1,243,160 |
2,079,293 |
| 12% |
81,104 |
224,036 |
475,931 |
919,857 |
1,702,207 |
3,080,973 |
| 15% |
87,342 |
263,018 |
616,366 |
1,327,0737 |
2,756,561 |
5,631,770 |
| 20% |
98,704 |
344,311 |
955,460 |
2,476,194 |
6,260,267 |
15,676,252 |
| Investment |
60,000 |
120,000 |
180,000 |
240,000 |
300,000 |
360,000 |
Table is for illustration purposes only. Past Performance may or may not be repeated in future.
Returns are market dependent and are not guaranteed.
Convenience:
SIP can be operated by simply providing post dated cheques or with
ECS. The cheques can be banked on the specified dates and the units credited into the investor's
account. The SIP facility is available in almost all of Equity, Balance & MIP schemes. Further,
SIP can be started with amounts as low as Rs.500/, depending on the scheme. These conveniences also
make SIP a very ideal investment vehicle for small & retail investors.
Thus, with the above benefits, it is no doubt that SIP is a true friend for investors in creating
wealth. An investor should however know that the market is unpredictable and returns cannot be
guaranteed. However, if one is investing wisely for a longer duration of time, it definitely will
help the investor in reducing the risk of the market and making significant wealth. The tool is
there. It is how you use it that really makes a difference for you.
Imp.Note: We are registered NJ Wealth Partners and this interview published is
sourced from NJ Wealth with due permissions. Reproduction of this interview/article/content in any
form or medium by any means without prior written permissions of NJ India Invest Pvt. Ltd. is
strictly prohibited.
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