In last article I have mentioned the benefits of investment in mutual funds in India. Where traditionally investors want to invest their hard earned money in fixed deposit because due to its secured nature but now in past several years investors approach towards investment in mutual funds has drastically changed and investors taking risk (at certain level) for good return which is not possible in fixed deposits.

So everybody knows the benefits of mutual funds. But when we hear the word mutual fund, the very first thing which comes in everybody mind is SIP. All of us correlate SIP with Mutual Funds. But many of us don’t know the actual meaning of SIP.

So very first question arise in our mind is what is SIP and how SIP is correlate with Mutual Funds?

Now before I getting start discussing all about SIP, I want to share one incidence of my friend name Vijayan 28 years old working in automobile company as design engineer live with his family in Bangalore. He is very well educated love music and live happily with his family. As a common man he is also want to secure his family future like others. So typically he follow his father and grandfather for savings. There savings predominantly invested in fixed deposits (FDs), recurring deposit (RDs) and insurance plans. Vijayan picks his investment habit from his father and grandfather and continue to invest in these traditional options. He met me last year and ask me why not RD and why SIP (as I am regular investor in mutual funds). Then I tell him the benefit of SIP.

Systematic Investment Plan (SIP):

What is SIP?

In simple term, SIP is an investment tool that helps you to invest regularly in small portions or we can say that small amount of money investment on predefined date of every month. SIP is a smart financial planning tool that helps you build wealth over a period of time. You are not required to invest lump sum money from your pocket.

You can invest in SIP on monthly or quarterly basis and the minimum amount for most the mutual funds scheme is Rs 1,000/-. However the tenure may vary scheme to scheme. In order to maximise your returns, it is always advisable to stay invested for longer period of time.

Advantages of Investing using Systematic Investment Plan (SIP):

Regular and Discipline Investment:

The basic funda of investment is to always focus on regular and disciplined approach. SIP allows one to invest a fixed amount of money at regular intervals – monthly or quarterly basis. In most cases amount is automatically deducted from your bank account. For example if you decided to invest Rs 1000/- every month in particular mutual fund. You can start an SIP by giving post dated cheques to the mutual fund or you may take advantage of the Electronic Clearance System (ECS) in which the amount would be automatically debited from your account on a specific date. So at end of the year you invest Rs 12000/- in mutual fund. This amount seems quite big for common man. So he may be unable to invest this amount in lump sum. So SIP brings benefit of regular and discipline investment.

Rupee Cost Averaging:

This is called important benefit of investing in SIP as it saves you getting hit by market fluctuations. Investors invest fixed amount of money every month in any type of mutual fund which brings more units when NAV/price is low and less units when NAV/price is high. So its hardly matter what is current market situation is. At end of particular period you always have higher amount of units. For example, you invest Rs 1000/- in first month and NAV (Net asset value) is Rs 10/- so you get 100 units in first month. In second month market comes down and NAV was Rs 5/- so now you get 200 units in second month. Now in third month market goes up and NAV was at Rs 20/- so now you get 50 units. So after three month total units you will get 250. This brings rupee cost averaging over a long period of time.

From below table you can more easily understand how SIP works?

Investing through SIP is done using ECS or the Electronic Clearing System. This is very easy way and money will be debited directly from your bank account towards mutual fund investment.

SIP Investment

Date

Investment Amount

NAV

Units Purchased

Jan-17

                                         1,000

                                             150

                                           6.67

Feb-17

                                         1,000

                                             148

                                           6.76

Mar-17

                                         1,000

                                             152

                                           6.58

Apr-17

                                         1,000

                                             148

                                           6.76

May-17

                                         1,000

                                             145

                                           6.90

Jun-17

                                         1,000

                                             143

                                           6.99

Jul-17

                                         1,000

                                             135

                                           7.41

Aug-17

                                         1,000

                                             132

                                           7.58

Sep-17

                                         1,000

                                             138

                                           7.25

Oct-17

                                         1,000

                                             140

                                           7.14

Nov-17

                                         1,000

                                             141

                                          7.09

Dec-17

                                         1,000

                                             143

                                           6.99

Total

                                       12,000

 

                                         84.11

Average Price per Unit

                                       142.68

   

One Time Investment

Date

Investment Amount

NAV

Units Purchased

Jan-17

                                       12,000

                                             150

                                         80.00

Total

                                       12,000

   

Average Price per unit

                                       150.00

   

From above example it is very clear that if we do lump sum investment then we have less amount of units at end of particular period as compare with investment done through SIP.

Other Benefits:

A Systematic Investment Plan offers so many other benefits that make investment more comfortable and enjoyable. Investor can start investment with a low amount of Rs 500/- or 1000/- per month. Also many mutual fund schemes waive off entry and exit load if investment is done through Systematic Investment Plan (SIP). Investor can take benefit of SIP in taxation also as SIP’s are taxed for capital gain on first in first out basis.

So at the end I only say that SIP’s are more flexible, convenient and easy for investment in mutual funds. In SIP, Investors can enjoy the benefits of high return with low risk. Key benefit of SIP is that it gives you the opportunity to maximize your returns without fear of current or future market situation. The only rule which you want to follow is Start early, Stay Longer & Be Discipline while investment in mutual funds.

For more clarification or want more detail on this you can easily connect with me at info@rupayabazaar.com or at my facebook page @manishabhatia.rupayabazaar

Leave a Reply

*
*

Required fields are marked *