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Simply SIP!
The title belies great expectations! What has SIP got to do with investments? Isn’t SIP more appropriate while discussing health rather than wealth? This article takes a peek into Systematic Investment Plan (SIP) - a simple, tried and tested strategy designed to help you create wealth in a disciplined manner over the long term. SIP in a Capsule There are two ways in which you can invest in a mutual fund - one-time outright payment and periodic investments. The latter is referred to as a SIP. SIP is a method of investing a fixed sum, regularly, in a mutual fund. Once you have decided on the amount you want to invest, the frequency at which you want to do so (a month, a quarter or half-year), the period for which you want to invest and the mutual fund scheme in which you want to invest, you can either give post-dated cheques, ECS instruction or start a SIP online, and the investment will be made regularly. The Modus Operandi Straightening the meandering cost… A SIP means you commit yourself to investing a fixed amount say, Rs.1000 every month. At the end of a year, you would have invested Rs 12,000 in your fund. Let us say the NAV on the day you invest in the first month is Rs 20; you will get 50 units. The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs 18. You will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000 and vice versa. This is called Rupee Cost Averaging. …and dual penalty for early exit. Initially, funds never charged an entry load on SIP. Then funds slowly hiked it as the idea of SIP became popular. An exit load may be charged if you stop the SIP mid-way. If, during the course of this period, you realise you cannot continue with the SIP, you have to inform the fund 15 days prior to the payout. The SIP will be discontinued. You can continue to keep your money with the fund and withdraw it when you want. When you want to withdraw, you will have to give a redemption request to the fund wherein your units will be redeemed. If you sell the units after a year of buying, you pay no capital gains tax. If you sell it before a year, you pay capital gains tax of 10%. The system of first-in, first-out applies here. The units that you sell first will be considered as the first units bought. SIP your wagon to the star! Given that the average per capita income of an Indian is approximately only Rs 25,000 (i.e. monthly income of Rs 2,083), a Rs 5,000 one-time entry in a mutual fund is still asking for a lot (2.4 times the monthly income!). In a SIP, you do not have to make initial high-ticket investments to get started – the amount is a measely Rs.500 or Rs.1000. You can also invest a lump sum in the same account in which you are doing a SIP, if you choose to. So, it suits both small and big investors alike. SIP ensures you are disciplined in your savings and do not divert your savings earmarked for investment purposes towards spending, thereby, helping you build wealth for your future. The early bird gets the worm is not just a part of the jungle folklore. Even the early investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. The power of compounding underlines the importance of making your money work for you at an early age. An individual starting at age 25, having 35 years till retirement, would need to save only Rs 6,985 per month (at an interest rate of six percent) to make a crore of rupees on retirement. An individual who starts saving at age 35, having only 25 years to retirement would have to invest Rs 14,359 per month to reach a crore. Such is the magic of compounding and it has been rightly referred to as the “eighth wonder of the world!” Most retail investors are not comfortable with stocks and are even more out-of-sorts with stock market oscillations. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? It is because they either got the stock wrong or the timing wrong. Both these problems can be solved through a SIP in a mutual fund with a steady track record. Rupee cost averaging comes to the rescue…making market timing irrelevant. Tide over minor blips… SIP does not protect you from making a loss in constantly declining markets. Keep track of the long-term market trend. But ignore minor swings in the market. Rupee cost averaging is of no use if your portfolio is fundamentally not sound. Do your research and monitor your investment periodically so that you are not caught off guard. SIP your way to investment success! SIP works in a well-diversified equity fund in the long run. When you put forth arguments that it does not work for you, you have either not chosen a good fund or are looking at a 12 month horizon. A SIP allows you to take part in the stock market without trying to second guess its movements, which you would all agree is next to impossible. Over the long run, you multiply your money manifold. Simply SIP!
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n Mrs. Lalitha Muthu e-mail : lalitha_ppm@yahoo.com |
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Articles by Lalitha Muthu |
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Systematic
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