Hearing the word `Systematic` itself makes us feel that something or someone is well planned, well organized, or well managed and the output or result of that systematic activity or person would definitely be the best. Systematic Investment Planning (SIP) is a regular, disciplined, planned and periodic investment of small amounts of money in mutual funds at regular intervals. Many of us always think that we should invest in stocks or mutual funds, as equity can generate wealth in the long run. But the scary part of investing in equity is that if we invest in one or two specific stocks, then we are putting all our eggs in one basket which is very risky as anything can happen to our portfolio with a single swing in markets.
If you are risk averse then you should opt for SIP of mutual funds which is best mode for investing in equity market as fund raised through mutual fund is invested in different stocks spread across various sectors and market capitalizations. The plan aims at a better future for its investors as an SIP investor gets good rate of returns compared to a one time investor as he doesn`t try and time the market - which is next to impossible. This simple disciplined program of investment has many inherent advantages for retail investors which are as follow.
First, it inculcates the discipline of SAVING plus it offers CONVENIENCE in investment, although small amounts but regularly. Since you commit the post dated cheques or standing instruction to the bank to debit the monthly installments, it makes you to save every month.
Its inherent POWER OF COMPOUNDING produces amazing returns which you cannot imagine. As you keep investing, even though a small amount of money regularly, it can grow into a significant amount over a period of time. It is always recommend that one must start investing early in life to get the maximum benefit from compounding. Let`s take an example to understand it more clearly.
For e.g.: Person B started investing Rs 10,000 per year at the age of 30. Person A started investing the twice the amount every year at the age of 45. They decide to retire when they both reach the age of 60.
From above table, MB has built a corpus of Rs 12.23 lakhs while Mr. A`s corpus will be Rs 5.86 lakhs. Both have invested a total of Rs 300000. But Mr. B has managed to get more than twice what Mr. A received. That difference is due to the effect of compounding. The longer the compounding period, the better the final returns on your investments will be.
SIP also ensures you benefits of RUPEE COST AVERAGING. Rupee Cost Averaging is an effective market‐timer mechanism that eliminates market volatility. Since the amount invested per month is constant, one buys more units when the price is low and fewer units when the price is high. As a result the average unit cost will always be less than the average sale price per unit, irrespective of the market rising, falling or fluctuating. The table given below clearly illustrates the concept.
Month
Amount you invest
NAV
No. of units
1
Rs 1000
Rs 10
100
2
Rs 1000
Rs 12
83.333
3
Rs 1000
Rs 10
100
4
Rs 1000
Rs 8
125
5
Rs 1000
Rs 10
100
Total
Rs 5000
Rs 50
508.333
The average NAV = 50/5 = Rs 10
Average buying price = Total investment / Total no. of units
= 5000 / 508.333 = Rs. 9.84
Forth, it is mostly SUITABLE to small investor as it is affordable to pay a small amount regularly than paying a large amount as a whole. You can start with as low as Rs 100 a month. Thus, it`s like you put aside affordable sums of money and over the long run you could accumulate unbelievably great wealth.
Fifth, it ensures easy liquidity as investor can have the liberty to exit at any time even before the agreed time period. But some exit load shall be charged if you withdraw before one year.
Hence, if we look at the roller‐coasting equity markets and then compares it with the concept of Systematic Investment Plans, we can conclude that in order to build a steady flow of income in the future it`s necessary to keep investing regularly over a period of time, in order to eliminate the market noise and realize your goals.
Mitul Shah is a financial planner from Adinath Investments.
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