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SIP for Dummies: Sure shot way to make money?

14 Jul

How SIP works?

SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a MF by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in an MF. Thus, you can invest in an MF without altering your other financial liabilities. It is imperative to understand the concept of rupee cost averaging and the power of compounding to better appreciate the working of SIPs.

Any amount can be invested?

SIP has brought mutual funds within the reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, one-time investment. 

While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years. 

Why stick to your SIP?

The investors who entered the equity market at the peak in early 2008 have hardly made any money. Many of those who invested lump sums are either sitting on losses or have barely recovered their principal. The SIP investors, however, have a different story to tell. Their investments have earned handsome returns. The Quantum Long Term Equity fund has been the best performing large- and mid-cap equity fund in the past five years.

If you had invested Rs 3 lakh in it at one go on 1 January 2008, your investment would have grown to Rs 4.35 lakh, a return of 7.72%. However, if you had staggered your investment through monthly SIPs of Rs 5,000, the value of your investment would be higher at Rs 4.76 lakh, a return of 17.16%.

Dizzy Investors run away in the middle.

 Though most investors are aware of the power of SIP and the benefits of disciplined investing, the mutual fund data indicates that investors tend to lose faith very soon. Stopping your SIP when the market is doing badly is perhaps the worst investing decision you can make. It defeats the very purpose of systematic investing and rupee cost averaging. If you invest when the market is subdued, your SIP will buy more units because the prices are low. By terminating your SIP, you forfeit the opportunity to buy low. When the market picks up again, the value of your investments will zoom.

You should have a vision of at least 5-6 years and I am sure your returns will be awesome.

Some of the good SIP funds and their returns:

Return Between 1st Jan 2008 and 31st Dec 2012
Scheme SIP Return % Return%
Quantum Long
 Term Equities
17.16 7.72
UTI Opportunities 16.83 5.91
Canara Robeco Equity
 Diversified Regular
16.3 4.64
ICICI Prudential
Top 100 inst.
14.31 4.18
Franklin Blue chip 13.72 4.07
SBI Magnum
Emerging Businesses
28.12 4.01
ICICI Prudential
 Discovery inst. 1
23.05 9.27
Reliance Equity
 Oppurtunities Inst
22.28 6.94

The poorest performing large-cap fund, LIC Nomura Opportunities Fund, has delivered a return of 5.79% through SIP, while lump-sum investments have lost 5.94% every year. This is the magic of SIP investing.

So if you are planning for any long term goals that are expected to come only after 5-6 years then this is the right time to start investing in SIP of large cap diversified equity funds

In SIP you automatically end up buying more units when the markets are low and lesser units when the markets are moving up. This way you proof yourselves from the volatility of the markets.

Does it always work?

Yes, in most cases it should work though there is no surety or guarantee. Though referring to past performance is not right, but just of this case we assume one was investing Rs 5,000 per month in an SIP in HDFC top 200 from July-2008 to Jun -2013. He would have invested about Rs 3 lacs over a period of 5 years and he would have got Rs 3.67 lacs today. This is an annualized rate of 8% (tax free), and that too when the markets are going through one of the toughest patches.

There are many cases where investors lost money and got out with a heavy heart.

You need good amount of luck to get consistent return.

If the return is 7-8%, why don’t we move to quality fixed deposits and get out of the tension of stock market.

So what I mean is you need to do basic study  and do  not go by what your broker friend tells or your mutual fund seller friends says.  If you are happy with 8-9% return and don’t want much tension, Quality fixed deposits will help.

You must remember that your sweet talking brokers and fund managers make huge money out of your investment. Don’t always take their advice seriously and cross check with other sources before investing your hard earned money in any fund.

The power of compounding, to borrow the words of Albert Einstein, really is one of the wonders of the world. I think successful investing requires patience over a sensible time horizon. It also needs prudence, humility and above all, discipline.

Advice:

One must start at the earliest and save as much as possible. If invested prudently, the power of compounding can reap rich rewards for the early investor, even if the absolute amount invested is small.

Happy Investing!!!

 

 

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Posted by on July 14, 2013 in Uncategorized

 

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