What is SIP?
SIP, defined as Systematic Invest Plan, is a vehicle offered by mutual funds to help you invest regularly. Just like a recurring deposit with the post
office or bank you can increase your mutual fund holding by adding a preset amount (as small as Rs. 500) via an SIP. The frequency of investment is
usually monthly or quarterly.
How SIP Works?
I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading
'Now is the time to buy.' - Peter Lynch
Through a SIP you invest in a mutual fund on regular basis irrespective of the market movement. For example, if you would have committed yourself to
invest lets say Rs 1000 every month for year 2006 in ABN AMRO Equity Fund, following would have been the result:
Approx
number of
Date Nav in Rs. units you
will get at Rs
1,000
1-Jan-06 19.74 50.66
1-Feb-06 20.75 48.19
1-Mar-06 22.05 45.35
1-Apr-06 23.93 41.79
1-May-06 24.9 40.16
1-Jun-06 20.61 48.52
1-Jul-06 20.3 49.26
1-Aug-06 19.98 50.05
1-Sep-06 22.26 44.92
1-Oct-06 23.72 42.16
1-Nov-06 25.09 39.86
1-Dec-06 27.29 36.64
In this case when the NAV was high, you get fewer units and when NAV is low you get more units. For the twelve months period, you would have
537.57 units of par value Rs 10 each by investing just Rs 1,000 every month. Your total investment of Rs. 12,000 would be now worth Rs. 14670.30.
SIP Vs. No SIP (For 7 month Period: May Nov 2006, using the above shown fund)
Case 1: No
Case 2: Using SIP
SIP
Investment One time Monthly (for 8 months)
1st May 1st of each month from May to
Invested on
2006 Nov.
Investment
Rs 70,000 Rs. 70,000 (10,000 per month)
Amount
3149.31 Monthly (401.61 +
Number of
2811.24 485.20 + 492.61 + 500.50 +
Units Bought
449.24 + 421.59 + 398.57)
Networth on Rs.
Rs. 85944.55
1st Dec 2006 76718.88
Gain Rs. 6718.88 Rs. 15944.55
Absolute
9.60% 22.78%
Return
SIP gives 137% more return than simple one time investment!
In first case you get fewer units and in Second Case you get more units because you keep on buying at low NAVs. Hence by using SIP you gain
137.3% more.
Why use a SIP?
Following are some of the key benefits of a SIP
Creates discipline in your investing activities: You are forced to direct some of your earning every month in a mutual fund of your choice. This
could either be debited directly from your account or you could give post-dated cheques to the mutual fund.
No need to second-guess the market: Stock market has a habit of fluctuating frequently without any warning, at least not to an individual
investor. Though SIP an individual investor can initiate a wealth building system without worrying about market ups and down. For example,
if you would have invested in Prudential ICICI Technology Fund during the dotcom and tech boom and subsequent slowdown in the sector
following would have been the result:
Now take a look how some funds performed when invested SIP way
in last 3 years
SIP Performance From 1June2007 to 1 June 2010 (37 Installments of Rs.5000/-
Birla Sun Life Frontline HDFC Top 200 - Growth Reliance RSF - Equity - Tata Equity P/E Fund -
Equity Fund - Growth Growth Growth
Summary: Summary: Summary: Summary:
Total Invested Total Invested Total Invested Total Invested
Amount : 185000 Amount : 185000 Amount : 185000 Amount : 185000
SIP Amount : 5000 SIP Amount : 5000 SIP Amount : 5000 SIP Amount : 5000
Total Units : 3096.2 Total Units : 1400.68 Total Units : 9276.23 Total Units : 5857.67
No of Months : 37 No of Months : 37 No of Months : 37 No of Months : 37
Current Price : 80.19 Current Price : 187.59 Current Price : 28.5619 Current Price : 44.3275
Current Value : Current Value : Current Value : Current Value :
248284.28 (as on 04 262753.56 (as on 04 264946.75 (as on 04 259655.87 (as on 04
Jun 2010) Jun 2010) Jun 2010) Jun 2010)
Return : 34.21% Return : 42.03% Return : 43.21% Return : 40.35%
Isnt it amazing!
By: Aditya Kachru
Safe Invest India
Financial Advisory & Distribution Services
0-9818-26-9396 | info@safeinvestindia.com
