Systematic Investment Plan –showing difference from risk free lump sum investment.
I am Suvendu, a senior finance person with more than 25 years exposure am living with my family in Kolkata. I am a reader, writer, love music and am inspired by my respected parents. My father had worked in a State Govt. Undertaking and his entire life savings were predominantly invested in fixed deposits (FDs), recurring deposits (RDs) and traditional insurance plans. Earlier I had picked up my investment habit from my family and continued to invest in fixed and recurring deposits. A few years back I met one of my past colleagues who has invested in SIP since last 3 years and my question to him was ‘why not RD, why not FD, why not traditional insurance plans, why SIPs? ‘
Systematic Investment Plan (SIP):
“Little drops of water make the mighty ocean”
Systematic Investment Plan (SIP) is nothing but small amount of money invested on a pre-set date every month into specific mutual fund/funds. One of the best ways of entering equity market is through Systematic Investment Plans (SIPs) in equity mutual funds, as it brings in an investment discipline for the investor. SIPs help to achieve financial goals by investing small sums of money on a monthly basis that eventually leads to accumulating the required corpus for reaching the goal.
For some investors who are afraid of long term commitments like PPF or Insurance plan, SIPs are the answer. They are flexible:
- SIPs are done in open-ended funds where the investors can invest and take out the money anytime
- There is no fixed tenor for running SIP. Once the SIP tenor is fixed, it can stopped in between or could be continued even after the tenor by placing the request with respective mutual fund company
- Full and partial withdrawal is possible during or after the SIP tenor The SIP amount can be increased or decreased
- The SIP amount can be increased or decreased
Just because SIPs are flexible doesn’t mean that the investment horizon could be shorter. Ideally, to reap the benefits of SIPs, the investment horizon should be for a longer term. Longer the investment horizon, better the wealth accumulation.
SIP is a tool which makes sure that what you save is what you invest. In fact, it is putting your regular savings into regular Investment. It makes sure that you don’t over-spend if the money would lie idle in your savings account. It also works on the principle of Power of Compounding as the moment you save, you are investing immediately and hence you give maximum time to your investment.
SIP in Equity Funds would work the best in case markets are going down and not when the markets are rising. But the fact that we don’t know when the markets will be heading south and when it be heading north, it is prudent to run your SIP always so that you average out. But if in the last 1 year, had the markets were to go down, Investor would not have increased his SIP today. He would have thought that SIP is a bad way to invest even though he or she would be buying more units at lower levels. This is what happened in 2008 and early part of 2009 where lakhs and lakhs of SIPs were closed as investors felt that their investment value is going down. Now if you look at SIP return for those who has continued their SIP in bearish phase, their investments are giving excellent returns.
How we can calculate the returns from SIP?
It can be done through rate formula in excel.
NPER = Total no of periods/months
PV = 0
PMT = SIP amount (take this in minus)
FV = your current value
Type = 1
This will give an approximate rate. For exact calculation we need to use IRR/XIRR.