Monday, 7 May 2012

SCIENCE OF SIP

What is SIP and how does it work:
What is SIP and how does it work: Just like recurring account, in SIP investor commits fix amount on a regular basis. In fact SIP is more convenient and investor friendly than recurring deposit. Investor can start SIP in any of the mutual fund scheme. In this investor can decide a particular day of the month on which he/she wants to make investment. Once day is decided and mentioned in the application form, fixed amount gets debited from the account on that particular day and equivalent numbers of units get allotted to investor based on that day's NAV.
Why SIP : Automatic Market Timing & Rupee Cost Averaging:
The biggest advantage of SIPis you can time the market automatically, as irrespective of market level, you keep investing on a regular basis. This allows you to take advantage of rupee cost averaging as you can buy more units when market is down and fewer units when market is up.
As it is clearly evident through SIP, your average cost of holding units comes down compare to average NAV.In this example, if an investor invests Rs.1000 per month for 12 months he accumulates 1186.79 units in volatile market. His average cost of holding these 1186.79 units comes to Rs.10. 11131 compared to average NAVof Rs.10.1625. This logic holds true in any type of market condition.
Disciplined Investing:
Important secret of wealth creation is start investing early and take advantage of power of compounding. It's not important how much you start with, but what is important is to start early and start investing small amount on a regular basis. SIPis best suited for this objective.
Can be done with small amount:
In investment world it is said that 'you don't have to be Wealthy to be an Investor but you definitely need to be an Investor to become Wealthy.' Sothe crux of the point is no matter how small your investment is, you should never shy away from investing. Through SIP, you can start with as little as Rs. 100 per month. With these small drops you can create an ocean for yourself in long term.
Scores over traditional recurring deposit:
Compared to traditional recurring product which yields 8 percent p.a. one can expect around 15 percent return from his/her SIP investment. This can go long way in terms of wealth creation over a period of 10to 15 years.
How about monthly investments to grow your money ?
Suppose you start investing in a diversified equity mutual fund through a Systemtic Investment Plan at age 3540
Your monthly investment Rs. 5000 Rs. 5000
You stop investing at age 6060
Your total contribution Rs. 15 lakhsRs. 12 lakhs
Assuming compounded annualised returns from the fund of 15%, your savings could grow to Rs. 1,37,82,803.88
(over 1 crore 37 lakhs) *
Rs. 66,35,367.20 (over 66 lakhs) *
A difference of just 5 year can lead to a wealth difference of Rs. 71 lakhs !
SIP - The Mantra for Wealth Creation:
It is true that these are challenging times for investors. Equities are down for 2008 and many of the equity related investments over past 1 year are showing negative returns. But one should look at broader picture. We are witnessing correction in equity market after seeing sustained Bull Runfor last five years. SENSEX that was trading at 3390 at the beginning of 2003 had touched 20800 in beginning of Jan 2008. We have seen more than 60per cent return in equity market in last two years. So it is but natural that market stops for breather. Equity markets are like running a marathon race not about running 100-mt races. In 100-meter race one needs to be fast and furious but in marathon steady runner wins the race. So in equity market if we want to make money for next five to ten years, these kinds of healthy corrections are welcome as it provides great opportunity for investment when market goes through this kind of consolidation phase and then again start its upward journey to scale new highs.
So question that arises in retail investor's mind is: Is this a good time to invest or market will correct further? Where market will go from here on? What kind of return I can generate in next six months to one year if I invest today? Honestly speaking there-is no clear answer to these questions. We strongly believe equity market is not for short term but it is the best avenue to create long-term wealth and more so for a growth economy like India where corporate profitability is only likely to go up in coming years which will automatically translate into higher SENSEX valuation.
But Volatility is an inherent part of equity investment and retail investors can ride this volatility and make it work in their favor through Systematic Investment Plan route. We all are familiar with recurring deposit of post office or banks and majority of us must be investing or must have invested through this recurring deposit route in our life. SIPis nothing but modern version of recurring deposit.

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