The why’s and how’s of investing in SIP
Your money lying in a liquid fund, pending deployment to your chosen equity fund would fetch you higher returns than a savings bank account where you would have normally parked your surplus cash.
Why SIP?
The mantra for wealth creation is to invest early and regularly irrespective of the size of the amount invested. SIP investment is the ideal tool for this. The sooner you begin investing, the more time your money will have to grow because of power of compounding (shows in my earlier blog “8th wonder of the world: Compound Interest). Regular, disciplined investing. If you are a salaried investor, SIP investing enables you to save a fixed portion of your salary every month. You don't even need to remember your date of investment . Just enroll in a monthly SIP and give a bank mandate to your fund; every month a fixed sum will automatically get transferred from your account to your chosen equity scheme.
Small amounts. As an SIP entails regular investing; all you need is as low as Rs 100 a month to enroll, as against Rs 5,000 for a one-time investment.
How to invest in an SIP?
All Mutual Funds have predetermined dates of any given month on which an investor can make regular investments in SIP. For instance, if you receive your salary on the first of every month, you can choose seventh or tenth of every month as your SIP date. But if you get your salary by the month-end, the first of the following month would be the ideal, as you wouldn't want your money lying idle in the bank account for long.
I don’t have enough money to save:
This is what most of the people said when it comes to money. Think why we just invest for a particular expense like marriage, house, child education etc. and not for to be live freely in life without the worries about money. Please try to invest your money on regular basis from your younger age, as this will help you to become financially sound in future. Normally, people start investing after marriage or after born of child, but it’s too late to be a financially sound. Start early and “let you money works for you”.
Invest your money on monthly basis from your salary. You paid your all expenses from your salary, and then why not treat investment as an expense for you and your loved ones. You must hear “money makes more money”. So, invest your money in with good managed portfolio and this will provide you to earn more money. If you have knowledge of stock market then start and make some money out of it or you can go for mutual fund, in which fund managers work for creating wealth for you.
“The key is to make saving your habit and I assure you that it pays you even when you are not working”
Interactive
1st Person: I’m not able to save regularly. I don’t have the discipline.
2nd Person: Why don’t you start a mutual fund SIP? You can invest a small amount every month.
1st Person: The markets are doing badly. Do you think I should stop my SIP?
2nd Person: No, because this is a chance to get units cheaper. Then, as and when the markets rise you.
Indian equity market has been tottering since the beginning of 2008. Seeing the volatility the question on everyone's minds is: “Is this a good time to invest, or is worse yet to come”? If you believe that markets will fall further, you could stay in cash. We, however, do not believe in timing the market. Financial goals are important and it's always advisable to avoid timing the market as there's no telling how it might behave tomorrow, or the day after. Investing for short-term or long-term? When will the markets rise or fall, is anybody's guess. This, however, should not change your goals. So, how do you invest in the market, ride the volatility and still reach your financial goals? The short answer is systematic investment plans.
Under SIP, investments are a pre-specified amount, in a selected scheme and at pre-specified time periods, monthly or quarterly. In our view, investors should ideally invest via SIP over at least 2-3 years. This way they can exploit the most critical benefit of an SIP - rupee cost averaging. Let's understand how this is possible. Say, you invest Rs.1000 every month in a pre-determined equity scheme, and start when its net asset value was Rs.12 in January.
Your money lying in a liquid fund, pending deployment to your chosen equity fund would fetch you higher returns than a savings bank account where you would have normally parked your surplus cash.
Why SIP?
The mantra for wealth creation is to invest early and regularly irrespective of the size of the amount invested. SIP investment is the ideal tool for this. The sooner you begin investing, the more time your money will have to grow because of power of compounding (shows in my earlier blog “8th wonder of the world: Compound Interest). Regular, disciplined investing. If you are a salaried investor, SIP investing enables you to save a fixed portion of your salary every month. You don't even need to remember your date of investment . Just enroll in a monthly SIP and give a bank mandate to your fund; every month a fixed sum will automatically get transferred from your account to your chosen equity scheme.
Small amounts. As an SIP entails regular investing; all you need is as low as Rs 100 a month to enroll, as against Rs 5,000 for a one-time investment.
How to invest in an SIP?
All Mutual Funds have predetermined dates of any given month on which an investor can make regular investments in SIP. For instance, if you receive your salary on the first of every month, you can choose seventh or tenth of every month as your SIP date. But if you get your salary by the month-end, the first of the following month would be the ideal, as you wouldn't want your money lying idle in the bank account for long.
I don’t have enough money to save:
This is what most of the people said when it comes to money. Think why we just invest for a particular expense like marriage, house, child education etc. and not for to be live freely in life without the worries about money. Please try to invest your money on regular basis from your younger age, as this will help you to become financially sound in future. Normally, people start investing after marriage or after born of child, but it’s too late to be a financially sound. Start early and “let you money works for you”.
Invest your money on monthly basis from your salary. You paid your all expenses from your salary, and then why not treat investment as an expense for you and your loved ones. You must hear “money makes more money”. So, invest your money in with good managed portfolio and this will provide you to earn more money. If you have knowledge of stock market then start and make some money out of it or you can go for mutual fund, in which fund managers work for creating wealth for you.
“The key is to make saving your habit and I assure you that it pays you even when you are not working”
Interactive
1st Person: I’m not able to save regularly. I don’t have the discipline.
2nd Person: Why don’t you start a mutual fund SIP? You can invest a small amount every month.
1st Person: The markets are doing badly. Do you think I should stop my SIP?
2nd Person: No, because this is a chance to get units cheaper. Then, as and when the markets rise you.
Indian equity market has been tottering since the beginning of 2008. Seeing the volatility the question on everyone's minds is: “Is this a good time to invest, or is worse yet to come”? If you believe that markets will fall further, you could stay in cash. We, however, do not believe in timing the market. Financial goals are important and it's always advisable to avoid timing the market as there's no telling how it might behave tomorrow, or the day after. Investing for short-term or long-term? When will the markets rise or fall, is anybody's guess. This, however, should not change your goals. So, how do you invest in the market, ride the volatility and still reach your financial goals? The short answer is systematic investment plans.
Under SIP, investments are a pre-specified amount, in a selected scheme and at pre-specified time periods, monthly or quarterly. In our view, investors should ideally invest via SIP over at least 2-3 years. This way they can exploit the most critical benefit of an SIP - rupee cost averaging. Let's understand how this is possible. Say, you invest Rs.1000 every month in a pre-determined equity scheme, and start when its net asset value was Rs.12 in January.
SIP in a falling market
Month NAV No. of units
January 12.00 83.33
February 12.30 81.30
March 12.50 80.00
April 12.90 77.52
May 13.25 75.47
June 13.40 74.63
July 12.10 82.64
August 11.20 89.29
September 10.30 97.09
October 10.10 99.01
November 10.50 95.24
December 10.20 98.04
Avg. purchase cost of 12 Sip’s Rs 11.61
(The example is for illustrative purpose only. We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs 500.)
However, if the investor had opted for longer investment tenure of say 12 months, he could have benefited from greater fluctuations in the mutual fund's NAV. These fluctuations which arise over a market cycle lower the average purchase cost of the SIP over the long-term. As is evident from the table, if the investor had taken an SIP for 12 months his average purchase cost would have declined to Rs 11.61. But SIP has reverse impact also. Compare this with the average purchase cost of Rs 12.71 for a 6-month SIP.
SIP in a rising market
Month NAV No. of Units
January 12.00 83.33
February 12.30 81.30
March 12.50 80.00
April 12.90 77.52
May 13.25 75.47
June 13.40 74.63
Avg. purchase cost of 6month SIP Rs. 12.71
(The example is for illustrative purpose only. We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs. 1000.)
In the above table the average purchase cost of the SIP is Rs. 12.71. Clearly, the SIP has not worked in the investor's favor. Why is that? Because if he had instead invested lump sum in January, his purchase cost would have been Rs. 12.00 as opposed to the average purchase cost of Rs 12.71 over a 6-month period. Conclusion: “In an SIP, more units will be credited when a scheme's NAV is low and fewer units when it's NAV are high.”
Points to remember before opting for an SIP
1) SIP investing is meant to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to 'time' the market downturn.
2) SIP investing is equally beneficial in a falling market. Most investors believe that lump sum investments (as opposed to SIP investing) prove more beneficial in a falling market. This is only partly true. Having an SIP in operation during a falling market can ensure that investors stand to benefit should markets fall even further.
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