Understanding SIP investment is important for a step towards wealth creation. Systematic Investment Plan (SIP) is a method of investing in mutual funds systematically and regularly in small installments. Thus, It is useful in accumulating wealth by investing in small baby steps.
Everyone of us has some goal or ambition in our life which we plan to achieve. For some, it can be buying a house or a car at some point of time in future. For others it can be children’s education or marriage or their own retirement planning or financial independence. All these goals require huge sums of money to accomplish.
Now, everyone has goals but unfortunately very few of us are aware of the tools available to achieve these goals. To accomplish these goals requires very careful planning and discipline.
SIP full form is systematic investment plan. SIP can be very useful to achieve your goal of wealth creation through mutual fund investment.
What is Systematic Investment Plan (SIP) ?
Before understanding SIP investment, it is important to know what exactly a SIP is.
SIP or Systematic Investment Plan is the method of investing in mutual funds in a systematic manner in small regular predetermined instalments on regular time intervals over a period of time.
Investment intervals can be chosen anything from daily, weekly, fortnightly, monthly or quarterly as per individual requirements.
Similarly, instalment of the amount to be invested can be selected as per the comfort of the investor.
Usually, there is some lowest amount fixed by each company which the investor can opt to invest and there are multiples of that instalment which can be chosen for investment.
Let us take an example. Suppose a person X wishes to invest ₹ 4000 per month in a mutual fund for the next 5 years. He shall choose a good quality mutual fund for SIP investment. He can opt to invest the amount either ₹ 4000 monthly or ₹ 1000 weekly or ₹ 2000 fortnightly for the next 5 years.
Understanding SIP Investment
SIPs are considered best investment method for people who don’t have much knowledge of stock markets or who can not actively track the markets but yet want the exposure of the market to grow their investment.
Mutual funds remain the very good option to start a SIP for these people. Here, professional fund managers hired by the mutual fund companies do the work of managing the portfolio. The investor just needs to invest in the fund.
Each mutual fund scheme has a Net Asset Value (NAV) . It moves with the markets just like the price moves in the stocks. The movement in the fund is not as dynamic as in the stocks.
When you opt for sip plans, you buy the mutual funds at the NAV price available on the date of buying. Units are allotted to your portfolio.
When the markets are moving higher, the mutual fund NAV rises and you get less units. When the markets are moving lower the NAV falls which results in more number of units allotted. In this way, your buying gets averaged over the time period.
SIP acts like an automatic investment plan. You give the consent to deduct money by the mutual fund company and it gets deducted on each due date automatically.
SIP returns has been found to be over 12% in the longer investment horizons. Though being a market dependent instrument, the returns depend on the mutual fund performance and how the markets behave over that period of time. Equity mutual funds yield best returns although the risk is more. Balanced funds are relatively low risk mutual funds but returns are also lower than the equity funds.
By opting for a SIP, one can avoid investing in lump sum amounts and earn better return than lump sum investment.
How To Plan For A Goal ?
Before starting a SIP, it is very important to define your goal. This is really very important. Only after you have fixed your goal, you can plan the amount you need to invest and time period required for that investment.
You can use a SIP calculator to calculate the monthly investment required to reach the goal or the target amount you can accumulate by investing an amount fixed by you for a particular period of time.
After you have planned everything, then you should start investing in some of the best mutual funds in a disciplined manner. Keep investing every month or week whatever interval you have chosen without bothering about the market moves.
Lump sum vs. SIP investment Comparison
Let us see the advantage of investing via SIP through an illustration. I have chosen HDFC Top 200 Mutual Fund as investment option here. It is one of the top rated mutual funds. Two person Harsh and Ricky want to invest ₹ 90,000 in mutual funds.
On January 2011, Ricky goes for lump sum investment and gets 398.98 Units @ current NAV at that time (90,000 / 225.586) and exhausts all his investment sum in one go. Harsh choses to go for SIP in same fund on monthly intervals with sip amount of ₹ 2500 / month.
Harsh choses to go for SIP in same fund on monthly intervals with instalment fixed at ₹ 2500 / month.
Both invest for 4 years. Harsh has spread his investment over 3 years or 36 months. He didn’t need to exhaust his capital in one go. Every month he kept accumulating units at prevailing NAV (see below figure)
Harsh’s SIP continued till 02/12/2013. He accumulated 437.46 units till then. On January 2015, both sold their holdings.
On that day, NAV of HDFC Top 200 quoted at ₹ 345.46.
Investment of Ricky has market value of 398.98 X 345.46 = ₹ 1,37,782. Investment of Harsh turned to 437.46 X 345.46 = ₹ 1,51,077.
Ricky has a gain of 53.09% while Harsh got gains of 67.86%. Only understanding SIP investment and executing the plan made a difference of 14% in returns (see figure below)
Advantages Of Systematic Investment Plan
Understanding SIP investment can carry you far ahead in your dream of being rich. It is an important tool of investment management.
1. No need to time the market. By SIP, you continue to invest irrespective of the market levels. You buy more when markets are falling and buy less when markets are rising, giving you the benefit of Rupee cost averaging over the longer period.
2. Makes you disciplined towards your investment and goal achievement.
3. Risk of market movements is minimized by rupee cost averaging.
4. You need not to invest in lump sums. Small regular investments do the trick.
5. Helps in accumulation of wealth over the longer time horizons by compounding factor.
6. SIPs are beneficial for tax saving. This is called as equity linked savings scheme or ELSS. Investing in ELSS funds has the dual advantage of tax saving as well as high returns on SIP investment. You may also go for Equity Systematic Investment Plan (ESIP) or Systematic Equity Plan (SEP) by directly investing into good quality stocks. It is a sip in shares.