All market-linked investments go through ups and downs. To create wealth over the long run, a disciplined, far-sighted approach is critical and wins over a short-term one. For those investing in mutual funds, Systematic Investment Plans (SIPs) offer to create long term wealth. SIPs offer a simple and disciplined way to generate higher risk adjusted returns and meet the desired goals. The concept is similar to recurring bank deposits wherein investors contribute a fixed sum of money at regular intervals.

Even for the cash-rich, SIPs reduces the chance of investing at the wrong time and losing their sleep over a wrong investment decision. However, the true benefit of an SIP is derived by investing at lower levels. Other benefits include:

• 1. Discipline

The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundreds every month, rather than set aside a large sum for investing in one shot.

• 2. Power of compounding

Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. Let’s explain this with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a corpus of Rs 12.23 lakh while person B’s corpus was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-corpus. That difference is due to the effect of compounding. The longer the (compounding) period, the higher the returns.

Now, instead of investing Rs 10,000 each year, suppose A invested Rs 50,000 after every five years, starting at the age of 35. The total amount invested, thus remains the same - Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.

• 3. Rupee cost averaging

This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.

People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.

• 4. Convenience

This is a very convenient way of investing. One of the way is to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one’s account and will send the confirmation for the same. The most convinient option is to start SIP via your online trading account like ICICI direct, HDFC Securities, Sharekhan, India Infoline, Motilal Oswal etc. You simply select the mutual fund house and the scheme in which you want to start SIP, enter the investing amount, frequency (fortnightly, monthly or quaterly) and time period. Amount will get debited through ECS (electronic clearing service) based on the specified parameters defined by you.

• 5. Other advantages

There are no entry or exit loads on SIP investments. Capital gains, wherever applicable, are taxed on a first-in, first-out basis.

Monthly investment of a fixed amount brings in discipline into your fiscal behaviour. Since the amount gets deducted from your bank account automatically, you do not even realise it. This inculcates a savings habit, forces you to save and brings in a regularity in your investment pattern and helps you in reaching financial goals in a painless manner.

SIP Investment – 11 Myths

SIP Investment – SIP is not an Investment

Courtesy : http://www.tflguide.com/2012/02/sip-investment.html

These days SIP Investment is turning into a generic term, few people even think Systematic Investment Plan a.k.a. SIP is Mutual Fund. To give you clarity, “SIP is not an investment” it is a “way of investing systematically/regularly” in an asset class. Even Mutual funds are not investments – Mutual Fund is a term used for investment vehicle, which invests in Equity, Debt or other asset classes.

SIP is a great way to invest but there are few myths surrounded. Let me burst few of these through this post.

• Myth 1 - SIP in direct equities/stocks is a biggest myth

When you do a direct investment in Equities the first decision that you take is why you are buying a particular stock? Are you aiming a Value buying or a momentum gain? And in both the cases a prudent investor is clear of an entry level and target appreciation when he would enter or exit a stock. So why would he try to do a Rupee Cost Averaging if he has done the fundamental analysis? One would do a SIP in direct equities if he is unsure of growth of a particular company and sanity says one should invest equities when you have done your homework. But if your reason is that you don’t have a lumpsum amount to invest, I have another important point to share.

Second reason is SIP works for portfolios/indexes/mutual funds and not stand alone investments. Imagine what will happen to your investments if that stock price never recovered but now you will say that you will do SIP only in bluechip stocks or index stocks. And I am not surprised by your argument but let me tell you that even couple of year’s good performance of a stock or sector can make it a bluechip & even part of index. Let me share:

• Do you know about Zenith Ltd – I am not talking about Zenith Computers. Zenith Ltd was a top steel company & part of Sensex from 1982 to 1992.
• Few more stocks (definitely bluechips of that time) that were part of Index Couple of years back – Premier Auto, Arvind Mills, Balrampur Industries, Century Textiles, Hindustan Motors, Indian Organics, Indian Rayon, Mukund, Zee Telfilms, SCI India, GE Shipping, MTNL, NIIT.(If you keep interest in direct equity investments then you can check what happened with these stocks)
• What happened with Jaiprakash Associates – it was part of Index till Jan 2012.

Now you can say I would have avoided all these stock & many more that have not performed good. Just would like to share Warren Buffett here “In the business world, the rear view mirror is always clearer than the windshield.”

• Myth 2 - SIP is for small investors or salaried guys

Once I was talking to an HNI, and was explaining him about SIP, he was grinning all the time and at last he asked- Do Mutual Funds allow SIP of Rs 5 Lakh per month? Yes why not? It is made to believe that SIP is for Rs 1000 and that’s all. In fact the messages have gone wrong that if you are salaried and have a small disposable income; SIP is the only tool for wealth creation. SIP as we all know is a concept and not limited to the amount of investment. Irrespective of the amount one invests, he is investing in an asset where instead of timing the purchase he is averaging his per unit cost of his investment. The returns that he gets are in percentages and he tends to benefit in proportion to his investment.

• Myth 3 - SIP is a fund or a scheme

As I mentioned in starting that SIP are not mutual funds. When I was working for HDFC Mutual Fund, investors called and asked “What’s the NAV of HDFC Top 200 SIP Fund”? Lot of people thinks that SIP is a security or a fund. Basically SIP is a concept and not a fund or a stock or an investment avenue. It is a vehicle to invest. So almost all open ended mutual funds (yes, including debt and money market funds) offer a SIP. Besides mutual funds one can do a SIP in almost every asset class. Do you think a person investing Rs 5000/- every 1st of the month when he gets his salary in NPS is a SIP? Yes it is a SIP investment your ULIP investment & similarly.

• Myth 4 - SIP should be started when markets are high and should be stopped when it is low or vice versa

If you know when the markets will be high or low why are you doing a SIP in first case? SIP is a method where you tend to average the cost of investment through the volatility that is built in the price of the asset in which you are investing. So when we say something is volatile it means that it will have ups and downs. So if you play only when it is “up” or “down” how do you expect that the concept will work for you? SIP works when you give it time, whether the time is smooth, breezy or cyclonic. I know it is tough to invest when markets are bad, but here comes the Financial Behavioral aspects of disciplined investing. (Read: Do you really understand SIP)

• Myth 5 - I can withdraw money entire from ELSS after 3 years of SIP

It is true that you can withdraw the money in ELSS after 3 years, when you invest in a lump sum. But in case of a SIP each installment is a purchase transaction and each of these installment is locked for 3 years from the day it is invested. It works on the First-in First-out (FIFO) method. So in case you wish to withdraw entire amount you invested in 3 years through SIP, it will take 6 years. Be clear of it and then take a decision to invest.

6 Additional SIP Investment Myths by Anil Kumar Kapila (He is an avid follower of TFL; and always try to help other reader by solving their personal finance queries.)

• Myth 6 - SIP is a magical prescription for success

Many readers after reading the Magic of Systematic Investment Plans get the wrong impression that an SIP is a magical formulation that works irrespective of any other criteria. It is true that SIPs make more money even if the sensex goes nowhere over a period of time. It is also true that you can expect to make some money even if you are investing via SIP in an average mutual fund. But it must be realized that no investing strategy is immune to the kind of collapse that the stock market witnessed in 2008-2009.

An SIP does not guarantee returns or positive returns. If you opt for an SIP in a falling market and the market continues to fall as it happened last year, then your investment will suffer a loss on the whole.

The choice of the fund, the tenure of the SIP and the period of investment have a bearing on your overall returns. SIP works on the simple principle that you get more units at low NAV and less units at high NAV. Over time it evens out. It works best when the market is in the doldrums. Unfortunately, during this time most investors panic and terminate their SIPs in disappointment.

• Myth 7 - SIP gives better returns than lump sum investment

Just because SIP is considered to be the best way of investing in a mutual fund does not mean that it always gives you the best returns. If you make a onetime investment when the sensex is at its bottom, then lump sum investment will perform better as compared to carrying out an SIP by spreading the investment over a period of time. SIPs work to smoothen out the volatility in the medium term. Over the long run, in a rising market in a growing economy like India, lump sum investing will always out perform an SIP.

However, we should not be comparing returns of SIPs with lump sum investing. Both serve different purposes. In reality investments are made at various points in time and it is not possible for anyone to know the top or the bottom of the market. Moreover, most small investors do not have the financial capability to make large lump sum investments. As soon as you decide to invest lump sum amounts, you are instantly a host to market timing.

If you have strong stomach and don’t panic on seeing your money evaporating in theshort term, you can definitely try your luck at lump sum investing. But if you are a normal investor with a comparatively low risk appetite, it will be better for you to stagger your investments via the SIP route.

• Myth 8 - There is a right time for SIP investing

Many investors are always trying to time the market. They do not understand that it is time in the market not timing the market that is important. The most common question of the investors- Is it the right time to start SIP? Obviously the correct answer- All times are good times for starting SIP.

• Myth 9 - I cannot miss my SIP dates

You must always ensure that sufficient funds are available on the SIP date in your bank account. SIP is entirely at your free will. If for some reason you are not able to maintain balance in your account for the SIP it simply means that you will miss one SIP but you will not be penalised for that from asset Management Company. (you can check what your bank charges ) Your SIP account remains active even if you miss one SIP date but after 3 miss it get cancelled.

• Myth 10 - I cannot make lump sum investment in a fund where my SIP is running

Some investors think that they have to maintain separate accounts for SIP investments and lump sum investments in the same fund. SIP is just a mode of investing in a mutual fund. You can always make some lump sum investments in a fund in which your SIP is running. There is no need to maintain separate accounts.

• Myth 11 - SIP dates are important

Many novice Investors feel that SIP date plays an important part in their SIP returns. SIP date has no significance in long term. It is just a date for your convenience.

Now hopefully you will not say SIP Investment is giving good returns or these days, SIP Investment is negative. Feel free to add your SIP related questions in comment section.