Mutual Fund SIPs: Smartest Way to Create Your Wealth
Written on Saturday, March 26, 2016
By Bajaj Capital Mutual Fund Group
Systematic Investment Plan (SIP) is a smart financial planning tool that helps you to create wealth, by investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.).
In simple terms, a SIP is a disciplined planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.
Benefits of SIP:
- Helps in taking advantage of Rupee Cost Averaging: It helps the investor to tide over the ups and downs of the market. In current situation where the Indian market is so volatile, the investors who have invested through SIP are least affected.
Lets understand how Rupee cost averaging works:
Average cost: Rs. 10.08/- (i.e. Rs. 30.25/3)
Average Investment per unit 1500/149= Rs. 10.06/-
Therefore, the gain is = Rs. 2.98 (i.e. (10.08-10.06)*149)
- Disciplined Investing: SIP develops a disciplined approach towards investing money since the amount to be invested is very small so it is easy for an investor to pull out few hundred rupee notes out of his monthly expense
- Take advantage of power of compounding: The rule for compounding is simple - the sooner you start investing, the more time your money has to grow. Systematic investing has a compounding effect on your investments.
In the long term, an investment of Rs. 5,000 per month could grow into a significant amount. This may be best explained by the following graph. The graph shows the value of investment at various rates of return for Rs. 5,000 invested every month for 30 years.
Start Early + Invest Regularly = Create Wealth
- An individual who starts planning for his retirement at 25 years of age by investing Rs. 5,000 per month may collect up to Rs. 3.25 cr at retirement (60 years), whereas his investment over the period could be just Rs. 21 lakh. On the other hand if the same individual delays his retirement planning by 5 years, the wealth created at retirement could reduce significantly to approx. Rs. 1.76 crs.
Albert Einstein has very well said - "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."
- Convenience: This is a very convenient way of investing. It’s very light on your wallet. You have to just submit cheques with the completed enrollment form. Automatic debit facility from the investor’s bank account is also available.
An investor can enjoy all these benefits only if he/she continues with the SIP for minimum tenure of 5-10 years or perpetual.
SIP Perpetual is a favorable trend among investors these days as it is very difficult to keep a track of all SIP investments and their renewal dates.
The main advantage of SIP Perpetual is that it is an excellent tool for investors to build wealth. There is no need for a one-time lump sum investment. A regular investment pattern helps build discipline in investors. Also, the compounding effect after five years in a perpetual SIP is far better than one year SIP.
Reasons for doing investment through SIP in Today’s Volatile Market
Yes!!! Today’s Volatility in Equity Market can be beaten with SIP. Systematic Investment Plan is a TIME TEST STRATEGY; it has been proven number of times that SIP is the Cure of Volatility in the equity market.
Let’s understand with the help of few live examples:
When an investor invested in Mutual Fund SIP when Market was high but discontinues when market is at low
Mr. X started a SIP in HDFC Mid-Cap Opportunities Fund (G) for Rs. 10,000 per month on 1 Jan 2008 when Sensex was at 20301 level (i.e. market was at its high) however he discontinued with SIP on 30-Apr-2009 when market was in downward trend. On the other hand, Mr. Y also started a SIP on the same date and with the same amount and still continuing with SIP.
Let’s see the current market value difference:
As per the below graphical representation, Mr. Y took the right decision and continued with his SIP. On the other hand, Mr. X should have not time the market and should have continued with his SIP.
Mutual fund SIP helps in solving the problem of when and where to invest during volatile times.
SIPs outperforms Lump sum investments
Lump sum investing has an element of market timing, which if you get wrong can make your stomach churn. Mr. E invested through lumpsum mode in HDFC Mid-Cap Opportunities Fund(G) on 1- Jan-2010 and Mr. F also invested in the same scheme on the same date but through SIP mode, now see below the difference between the returns:
Source: ACE MF (from 1-Jan -2010 till 10-Dec-2015)
This case clearly indicates that SIP is always a better investment strategy than a Lumpsum strategy for doing investment at any level of market.
Hence, timing markets is difficult and SIPs will help you avoid the hassle of timing markets.