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Jun 7, 2010

SIP: Systematic Investments Plan








SIP, defined as Systematic Invest Plan, is a vehicle offered by mutual funds to help you invest regularly. Just like a recurring deposit with the post office or bank you can increase your mutual fund holding by adding a preset amount (as small as Rs. 500) via an SIP. The frequency of investment is usually monthly or quarterly.

How SIP Works?

“I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'” - Peter Lynch

Through a SIP you invest in a mutual fund on regular basis irrespective of the market movement. For example, if you would have committed yourself to invest let’s say Rs 1000 every month for year 2006 in ABN AMRO Equity Fund, following would have been the result:
Date
Nav in Rs.
Approx number of units you will get at Rs 1,000
1-Jan-06
19.74
50.66
1-Feb-06
20.75
48.19
1-Mar-06
22.05
45.35
1-Apr-06
23.93
41.79
1-May-06
24.9
40.16
1-Jun-06
20.61
48.52
1-Jul-06
20.3
49.26
1-Aug-06
19.98
50.05
1-Sep-06
22.26
44.92
1-Oct-06
23.72
42.16
1-Nov-06
25.09
39.86
1-Dec-06
27.29
36.64
In this case when the NAV was high, you get fewer units and when NAV is low you get more units. For the twelve months period, you would have 537.57 units of par value Rs 10 each by investing just Rs 1,000 every month. Your total investment of Rs. 12,000 would be now worth Rs. 14670.30.
SIP Vs. No SIP (For 7 month Period: May – Nov 2006, using the above shown fund)

Case 1: No SIP
Case 2: Using SIP
Investment
One time
Monthly (for 8 months)
Invested on
1st May 2006
1st of each month from May to Nov.
Investment Amount
Rs 70,000
Rs. 70,000 (10,000 per month)
Number of Units Bought
2811.24
3149.31 Monthly (401.61 + 485.20 + 492.61 + 500.50 + 449.24 + 421.59 + 398.57)
Networth on 1st Dec 2006
Rs. 76718.88
Rs. 85944.55
Gain
Rs. 6718.88
Rs. 15944.55
Absolute Return
9.60%
22.78%
SIP gives 137% more return than simple one time investment!
In first case you get fewer units and in Second Case you get more units because you keep on buying at low NAVs. Hence by using SIP you gain 137.3% more.
Why use a SIP?
Following are some of the key benefits of a SIP
  • Creates discipline in your investing activities: You are forced to direct some of your earning every month in a mutual fund of your choice. This could either be debited directly from your account or you could give post-dated cheques to the mutual fund.
  • No need to second-guess the market: Stock market has a habit of fluctuating frequently without any warning, at least not to an individual investor. Though SIP an individual investor can initiate a wealth building system without worrying about market ups and down. For example, if you would have invested in Prudential ICICI Technology Fund during the dotcom and tech boom and subsequent slowdown in the sector following would have been the result:

Now take a look how some funds performed when invested SIP way in last 3 years

SIP Performance From 1June2007 to 1 June 2010 (37 Installments of Rs.5000/-
Birla Sun Life Frontline Equity Fund - Growth
HDFC Top 200 - Growth
Reliance RSF - Equity - Growth
Tata Equity P/E Fund - Growth
Summary: 
Summary: 
Summary: 
Summary: 
Total Invested Amount : 185000
Total Invested Amount : 185000
Total Invested Amount : 185000
Total Invested Amount : 185000
SIP Amount : 5000
SIP Amount : 5000
SIP Amount : 5000
SIP Amount : 5000
Total Units : 3096.2
Total Units : 1400.68
Total Units : 9276.23
Total Units : 5857.67
No of Months : 37
No of Months : 37
No of Months : 37
No of Months : 37
Current Price : 80.19
Current Price : 187.59
Current Price : 28.5619
Current Price : 44.3275
Current Value : 248284.28 (as on 04 Jun 2010)
Current Value : 262753.56 (as on 04 Jun 2010)
Current Value : 264946.75 (as on 04 Jun 2010)
Current Value : 259655.87 (as on 04 Jun 2010)
Return : 34.21%
Return : 42.03%
Return : 43.21%
Return : 40.35%

Isn’t it amazing!


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