Many retail investors are using the systematic investment plan (SIP) to enter the financial markets and take advantage of compounding returns. An SIP allows one to buy units on a given date each month and 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. Investing in an SIP is easier in the long run rather than investing a lump sum amount each year. One can start investing in a systematic investment plan with even Rs 500 per month.
An investor can choose the mode of investment as monthly, quarterly or annually and can invest in equity funds, debt funds and gold exchange traded funds. Mutual fund houses offer SIPs in open-ended funds where an investor can invest. Once the tenor of the SIP is fixed, it should ideally not be stopped and money must be invested regularly. To reap the benefits of SIPs, the investment horizon should be for a longer term, which will help in wealth accumulation. An investor cannot change the regular investment amount during the SIP period. To alter the investment amount, one needs to start an additional SIP or close the existing SIP.
An investor can invest a fixed amount in a scheme every month or quarterly, depending on his convenience through post-dated cheques or through ECS facility. He will have to fill up an application form and SIP mandate form at the fund house and mention the SIP date. An investor can open an SIP online through the mutual fund company website and online distributor’s portal. The investor has the flexibility to choose the date for regular payments in a month. The amount will be auto-debited through a standing instruction given or post-dated cheques. The amount is invested at the closing net asset value (NAV) of the date of realisation of the cheque. 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 Rs 1,000, one can buy 50 units at Rs 20 per unit or 100 units at Rs 10 per unit, depending on whether the market is up or down. More units are purchased when a scheme’s 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.
Most fund houses waive off exit load if the investment is done through SIPs. Mutual fund companies do not charge any extra amount for the SIP. If you miss the investment of a particular month, then the fund house will try the next month. But if the investor fails to pay for for the second consecutive month the SIP would be closed. The mutual fund companies do not charge any penalty for non-payment of SIP.
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 Rs 24 lakh. If that investment grows by a conservative 7% a year, the total amount would be worth Rs 52 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 Rs 36 lakh over 30 years. And if the average annual return is 7%, one will get Rs 1.20 core at the age of 60.
An SIP 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.
SIP by Sip
Investing in an SIP is easier in the long run rather than investing a lump sum amount each year
One can start investing in a systematic investment plan with R500 per month
Mutual fund houses offer SIPs in open-ended funds where an investor can invest
Once the tenor of the SIP is fixed, it should ideally not be stopped and money must be invested regularly
One must start investing at an early age as the longer the investment horizon, the bigger the benefits
Most fund houses waive off exit load if the investment is done through SIPs. Mutual fund companies do not charge any extra amount for the SIP.