Systematic Investment Plan(Sip): A Disciplined Investment Approach

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Hearing the word Systematic itself makes us feel that something or someone is well planned, well organised, or well managed and the output or result of that systematic activity or person would definitely the best. Systematic Investment Planning (SIP) is nothing but a regular, disciplined, planned and periodic investment of small amounts of money in mutual funds at regular intervals without timing the markets.

Many of us always think that we should invest in stocks or mutual funds, as equity can generate wealth in the long run. But scary of investing in equity. Reasons?..many. The first reason is we never had enough money to invest. Then comes time to research and find out a particular stock. If we invest in one or two specific stocks, then we are putting all our eggs in one basket and we are afraid of it as anything can happen to our money. Then comes the most important question-when or at what level of the market to make the investment. If we invest when the stock market is at a very high level and the market falls after our investment, then you will have negative returns (loss).

If you are in this category of people, it is the time you had a look at the SIP of mutual funds.The amount of instalment can be as low as INR 500 and the frequency can be monthly or quarterly. This simple disciplined programme of investment has many inherent advantages.

First, it inculcates the discipline of saving, although small amounts but regularly. Since you commit the post dated cheques or standing instruction to the bank to debit the monthly instalments, or electronic debit clearing, it makes you to save every month some amount of money compulsorily which may be difficult otherwise for some people. The money is deducted from your bank account and invested in a mutual fund on a fixed date every month automatically.

Second, its power of compounding produces amazing returns which you cannot imagine. As you keep investing, even though a small amount of money regularly, it can grow into a significant amount over a period of time. The table below shows how a little amount saved every month can go a long way.

Monthly Savings – What your savings may generate

Savings per month

(for 15 years)

Total amount invested

(INR. in millions)

(INR in millions, 15 years later)* with rate of return

6.0%

8.0%

10.0%

50000

9.0

14.6

17.4

20.9

40000

7.2

11.7

13.9

16.7

30000

5.4

8.8

10.4

12.5

20000

3.6

5.8

7.0

8.3

10000

1.8

2.9

3.5

4.2

*Monthly instalments, compounded monthly, for a 15-year period.

Third, the SIP obviates the need or efforts of timing the market. The best way of investing is to buy when the market is at low and sell when it is high. But how do you predict the lows and highs of a market. It is difficult even for the stalwarts of the stock market investors. If the market is falling, you may think that it will further fall and wait for a while to make the investment. Then the stock market starts recovering before you realise and by that time you may have already lost the opportunity to buy at the lowest. When the markets are raising, you will be afraid of making an investment at higher levels and try to wait for a correction (dropping of market index) to take place. But what happens if the correction never comes and the stock market keeps rising? Then you lost even this opportunity also to invest. Similarly, if the markets are choppy (fluctuating widely), you find a reason not to invest your hard earned money.

So, trying to time the market is a futile exercise and a tough task. It would be great if we can take the advantage of the market fluctuations and this is where the SIP works well. By the process of investing regularly over a period of time, one gets to invest both in the highs as well as in the lows of the market which helps in averaging out the market volatility.

Let us take an example where Mr A invests INR 1000 every month through SIP for 12 months and Mr B invests the same amount of INR 12000 in one go at the beginning of the year. The no of units purchased by the amounts in both the cases are shown in the table below.

A’s Investment

B’s Investment

Month

NAV

Amount

(INR)

Units

Amount

(INR)

Units

Jan-09

9.345

1000

107.0091

12000

1284.1091

Feb-09

9.399

1000

106.3943

Mar-09

8.123

1000

123.1072

Apr-09

8.750

1000

114.2857

May-09

8.012

1000

124.8128

Jun-09

8.925

1000

112.0448

Jul-09

9.102

1000

109.8660

Aug-09

8.310

1000

120.3369

Sep-09

7.568

1000

132.1353

Oct-09

6.462

1000

154.7509

Nov-09

6.931

1000

144.2793

Dec-09

7.600

1000

131.5789

Total  

12000

1480.6012

12000

1284.1091

As can be seen from the table, you will end up buying more units when the prices (market levels) are low and fewer units when the prices are high.

At the end of the 12 months, A has more units (1480.6012) than B (1284.1091), even though both have invested the same money. That’s because A’s average cost is much lower than that of B.

A’s average unit price = 12000/1480.6012 = Rs. 8.105

B’s average unit price = Rs. 9.345

Fourth, SIP is easily affordable as the amounts involved are very little. It is like a recurring deposit with the difference that the process will be automatic as you need not deposit or fill forms every month. You need to only ensure availability of funds in your account on the date of SIP.

Thus, SIP imparts discipline of saving and investing both automatically without worrying about the market conditions.

While there are many advantages of an SIP, please be reminded that it does not guarantee positive returns always. If you have invested in a falling market, and it continues to fall, at the end of the SIP, your investments will suffer a loss. But it would be definitely better than a onetime lump sum investment which would have suffered even more. Similarly, if the market is rising continuously, your lump sum investment would do better than your SIP.

Overall, an SIP would be definitely a great investment approach as the real stock market undergoes all the phases of raising, falling and fluctuations and averaging out in all the phases would always be better than a onetime investment.

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