With markets on a roll, retail investors are increasingly investing in equity mutual funds via the SIP route. A systematic investment plan (SIP) helps an individual create wealth by investing small sums of money every month over a period of time. Investing at an early stage of life gives twin benefits: rupee cost averaging and the power of compounding.
SIPs allow one to buy units on a given date each month. One can start with a minimum amount of R500. The biggest advantage of an SIP is that the investor doesn’t have to time the market. When an investor times the market, he usually misses out on the rally or enters the market at the wrong time — either the valuations have peaked or the markets are on the verge of declining. Investing every month ensures that one is invested during the highs and the lows.
The growing popularity of SIPs could be gauged from the fact that additions to the schemes were close to 3.5 lakh in September compared with 1.5 lakh in January this year. Also, the average size of new SIPs has risen to about R2,500 every month from R2,000 in January, indicating that investors are now comfortable in putting more money in the markets. Data from the Association of Mutual Funds in India (Amfi) also show that fund houses registered a 4.6% increase in retail folios in the six months to September 2014, marking it the highest rise since March 2009 when the industry lobby started declaring half-yearly folio data.
The equity category, which reported a consistent decline in retail folios from H2FY11 to H2FY14, posted a record addition of 16.89 lakh folios in H1FY15 to 2.9 crore folios. In the six months to September, the 30-share Sensex has gained 19% on hopes
of economic reforms by the new government.
Analysts say SIPs make the volatility in the market work in favour of an investor and help average out the cost. This is called rupee cost averaging. For instance, with R1,000, one can buy 50 units at R20 per unit or 100 units at R10 per unit, depending on whether the market is up or down. More units are purchased when a scheme’s net asset value (NAV) is low and fewer units are bought when the NAV is high.
When the two situations are analysed together, the cost is averaged out and, the longer the time-frame of the investment, the larger will be the benefits of averaging. Moreover, SIPs also have the advantage of compounding — one must start investing at an early age as the longer the investment horizon, the bigger the benefits.
If you start out young, equity funds should constitute around 80% of your portfolio as this asset class has been found to be the best bet for growing money over the long term.
Starting the investment early helps one’s corpus grow. If one invests R10,000 every month when he is, say, 40, then, in 20 years, the amount saved will be R24 lakh. If that investment grows by a conservative 7% a year, the total amount would be worth R52 lakh when one reaches the age of 60.
On the other hand, if the same person had started investing the same amount of money 10 years earlier, the amount saved would be R36 lakh over 30 years. And if the average annual return is 7%, one will get R1.20 core at the age of 60.
SIPs can be an ideal way to accumulate money for retirement. After retirement, one can withdraw the money through a systematic withdrawal plan. However, after retirement, one should transfer the savings to low-risk asset classes such as debt.
Niranjan Risbood, director, Manager Research at Morningstar India, says: “The amount of money that can be spared every month to be invested in a risky asset class like equity to meet the investor’s financial goal would determine the SIP amount. Since the SIP is meant to tide over volatility in the markets, the longer the investment horizon the better it is.”
He advises investors to keep in mind the characteristics of the scheme/s like the fund manager and his long-term track record, asset management company and its philosophy, fund expenses and investment style, and so on.
Similarly, Brijesh Damodaran, managing partner of BellWether Advisors LLP, an investment advisory firm, says investing with a time-frame and mapping one’s investments to a goal are the key factors to investing in SIPs.
“Irrespective of the bull or bear phase of the market, one must invest in SIPs over longer periods and see the benefits of inflation beating returns,” he says.