Understanding SIP: A New Age Investment Tool

26 Mar, 2017 | 0 comments

SIP Feature
The term SIP is very common and is heard all around us. Some of us, in fact, learned that it is a very good investment opportunity. But a very few people understand its mechanism.
The popularity of SIP is obviously a very good sign as investors are testing new alternatives. In this segment, we will be discussing SIP – a new age tool of investment in a lucid manner.

WHAT IS SIP ?

The acronym derives from “Systematic Investment Plan”. This term is integrated with mutual fund investments. You can invest in mutual funds in two ways- either in lump-sum or at specified regular intervals. The second option is termed as SIP.
That means you fixed a period of investment in a mutual fund with an Asset Management Company (AMC), where you will be investing a fixed sum of money at regular fixed intervals e.g. quarterly or monthly.

WHY TO CHOOSE SIP ?

At present economic condition the popularity of SIPs are very eminent. It’s grabbing attention on both the ends- investors (you) and investee (mutual fund companies). In recent years, the world has witnessed major fluctuations.
Like the money market or the stock markets are on the extreme roller-coaster and banks are paying returns at its all time low. These factors are playing a vital role in instigating people to invest in mutual funds aggressively. Let’s learn a few points in this regard:
1. You are not a master: You know investing in mutual funds is very rewarding, but only when you pick the right fund at the right time. You can reap good returns when buying low and selling high. For that, you need to be alert about the market fluctuations and practice speculative trades based on market forecasts. Instead, you can go for systematic investment plans, where volatility is neutralized due regular investments in mutual funds.
2. Better than bank deposits: In comparison to recurring deposits offered by banks it’s always a better option to go for mutual fund SIP. The nature of instalment payments is same but the gain in case of the later one is much more, especially where the investment span is more than one year.
3. You don’t know when cash is required: This is vital. Mutual funds give you the ultra liquidity in comparison to other forms of investments. Specifically, SIPs can only be done on open-ended schemes that mean you are at freedom to invest or withdraw money whenever you like. There is no lock-in period for SIPs.
4. Super flexible: Unlike other conventional tools of investment mutual fund SIPs are flexible enough both in terms of instalment amounts and tenure of investment. What it means? It means you can terminate or extend your SIP investment at any time for any period. In the same way the SIP amounts can be increased or decreased too.

Reduce your tax on mutual fund returns to zero with a little bit of planning.

Why SIPs are better than lump-sum investments?

As you have read earlier, good gains out of mutual fund investment can be done only if you do it on right fund and at the right time. These uncertainties are common in case lump-sum investments.
But for Systematic Investment Plans (SIPs) the risk is very low and its almost certain you won’t suffer loss out of it, provided you do investments for a longer period say a year or more. Let’s understand the things with an example.

IN LUMP-SUM INVESTMENT:

XYZ Mutual Fund
Investment: Rs. 60000
Date of Purchase:10/04/2017 NAV: Rs. 25.68
Date of Sale: 10/04/2018 NAV: Rs. 30.52

Total units purchased: Rs. (60000/25.68) = 2336.445 units
Units sold for: Rs. (2336.445X30.52) = Rs. 71308
Total gain: 71308-60000 = Rs. 1308

SYSTEMATIC INVESTMENT PLAN (SIP):

DateInvestmentNAVNo. of Units
10/04/2017500025.68194.70
10/05/2017500026.21190.77
10/06/2017500025.22198.26
10/07/2017500023.17215.80
10/08/2017500022.92218.15
10/09/2017500021.24235.40
10/10/2017500022.78219.49
10/11/2017500024.76201.94
10/12/2017500025.28197.78
10/01/2018500027.77180.05
10/02/2018500028.33176.49
10/03/2018500029.52169.38
Total60000 2398.21

Total units sold for: Rs. (2398.21X30.52) = Rs. 73193
Total gain: 73193-60000 = Rs. 3193

It has been observed that whichever and whenever you buy a SIP it’s very rare that investors suffer loss, it’s because of the cost averaging of units as explained above. But for better results, it is always
encouraged to invest for longer periods beyond a year as with the passage of time the fluctuations in the NAV of a mutual fund tends to get neutralized and the chances of gain become brighter.
The term SIP is very common and is heard all around us. Some of us, in fact, learned that it is a very good investment opportunity. But a very few people understand its mechanism.The popularity of SIP is obviously a very good sign as investors are testing new alternatives. In this segment, we will be discussing SIP – a new age tool of investment in a lucid manner.

WHAT IS SIP ?

The acronym derives from “Systematic Investment Plan”. This term is integrated with mutual fund investments. You can invest in mutual funds in two ways- either in lump-sum or at specified regular intervals. The second option is termed as SIP.That means you fixed a period of investment in a mutual fund with an Asset Management Company (AMC), where you will be investing a fixed sum of money at regular fixed intervals e.g. quarterly or monthly.

WHY TO CHOOSE SIP ?

At present economic condition the popularity of SIPs are very eminent. It’s grabbing attention on both the ends- investors (you) and investee (mutual fund companies). In recent years, the world has witnessed major fluctuations.Like the money market or the stock markets are on the extreme roller-coaster and banks are paying returns at its all time low. These factors are playing a vital role in instigating people to invest in mutual funds aggressively. Let’s learn a few points in this regard:

1. You are not a master: You know investing in mutual funds is very rewarding, but only when you pick the right fund at the right time. You can reap good returns when buying low and selling high. For that, you need to be alert about the market fluctuations and practice speculative trades based on market forecasts. Instead, you can go for systematic investment plans, where volatility is neutralized due regular investments in mutual funds.

2. Better than bank deposits: In comparison to recurring deposits offered by banks it’s always a better option to go for mutual fund SIP. The nature of instalment payments is same but the gain in case of the later one is much more, especially where the investment span is more than one year.

3. You don’t know when cash is required: This is vital. Mutual funds give you the ultra liquidity in comparison to other forms of investments. Specifically, SIPs can only be done on open-ended schemes that mean you are at freedom to invest or withdraw money whenever you like. There is no lock-in period for SIPs.

4. Super flexible: Unlike other conventional tools of investment mutual fund SIPs are flexible enough both in terms of instalment amounts and tenure of investment. What it means? It means you can terminate or extend your SIP investment at any time for any period. In the same way the SIP amounts can be increased or decreased too.

Reduce your tax on mutual fund returns to zero with a little bit of planning.

SIP Image

Why SIPs are better than lump-sum investments?

As you have read earlier, good gains out of mutual fund investment can be done only if you do it on right fund and at the right time. These uncertainties are common in case lump-sum investments.But for Systematic Investment Plans (SIPs) the risk is very low and its almost certain you won’t suffer loss out of it, provided you do investments for a longer period say a year or more. Let’s understand the things with an example.

IN LUMP-SUM INVESTMENT:

XYZ Mutual Fund
Investment: Rs. 60000
Date of Purchase:10/04/2017 NAV: Rs. 25.68
Date of Sale: 10/04/2018 NAV: Rs. 30.52
Total units purchased: Rs. (60000/25.68) = 2336.445 units
Units sold for: Rs. (2336.445X30.52) = Rs. 71308
Total gain: 71308-60000 = Rs. 1308

SYSTEMATIC INVESTMENT PLAN (SIP):

DateInvestmentNAVNo. of Units
10/04/2017500025.68194.70
10/05/2017500026.21190.77
10/06/2017500025.22198.26
10/07/2017500023.17215.80
10/08/2017500022.92218.15
10/09/2017500021.24235.40
10/10/2017500022.78219.49
10/11/2017500024.76201.94
10/12/2017500025.28197.78
10/01/2018500027.77180.05
10/02/2018500028.33176.49
10/03/2018500029.52169.38
Total60000 2398.21

Total units sold for: Rs. (2398.21X30.52) = Rs. 73193
Total gain: 73193-60000 = Rs. 3193

It has been observed that whichever and whenever you buy a SIP it’s very rare that investors suffer loss, it’s because of the cost averaging of units as explained above. But for better results, it is always encouraged to invest for longer periods beyond a year as with the passage of time the fluctuations in the NAV of a mutual fund tends to get neutralized and the chances of gain become brighter.