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Women's Weekly: SIPs - made simple! - Views on News from Equitymaster
 
 
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  • Jul 29, 2009

    Women's Weekly: SIPs - made simple!

    Ok, so we've been telling you time and again for the past few weeks to save money and invest. Savings are important and investments can provide you with profits in the long term. We have seen that, now let's get down to business. How should YOU go about investing to keep your financial future secure?

    Very often we find ourselves as saying - "I don't have time to invest," or "I can't afford to put away a lot at this point." These are all excuses! We bring to you the concept of SIP - that is a Systematic Investment Plan - which allows you to periodically invest small fixed amounts, which grow at a compounded rate into a substantial amount at the end of your long term plan. An SIP is a service offered by mutual funds and provides you, the investor, with an option of committing a small quantity of money regularly towards investing as opposed to a lump sum investment. Simple? Well, we're just getting started!

    Why SIP is good

    Now that we are about to lay the foundation for regular investing through the means of SIPs, let's review why this is a good option to start with.

    A systematic investment option such as the SIP enables you to build wealth over a long term horizon. Generally, investors look to time the market. This practice is futile and more often than not, investors buy when prices are rising and sell when the prices are depressed. This is in stark contrast to the sound principle of equity investing - Buy when the price is low, sell when it is high. So how does SIP help in this regard? Since the amount invested each month is fixed, what changes is the net asset value (NAV). So, when the prices are down, the NAV dips which means that you get allotted more units of the fund. Similarly, when prices rise, you get allotted more units, plus the returns on your earlier units, acquired at lost costł rise. This does away with the risky business of timing the markets and ensures that you are investing in a disciplined manner.

    So you save and invest in an SIP, but do you know why and how an SIP is good for you, especially as a woman investor? First let's tell you why an SIP works in your favour. Most women save and spend in equal amounts (at least we hope they do!), though there are times when you find your hand reaching more towards your savings pocket to compensate for the shortfall in the spending account. As we mentioned in our Investmentsutra, a sure shot way to ensure the funds stay separate is to keep them in two different accounts. And then introduce the concept of SIP to your savings account! A systematic investment plan will enable you to maintain your savings in a disciplined manner and will also help you make money over the long term.

    How SIP works

    A systematic investment plan is not much different than the savings option of a recurring deposit account with a post office or a bank, except that these small monthly amounts are invested into a mutual fund. The SIP option is available with all types of funds like equity, income or gilt and works in your favour as the NAV (Net Asset Value) is averaged out as opposed to a one time buy. As you will be investing at regular intervals, the NAV may be higher or lower depending on market fluctuations.

      Person A     Person B  
    Month NAV* Amount Units Amount Units
    Jan-09 8.512 1,000 117.4812 12,000 1,409.774
    Feb-09 9.591 1,000 104.2644    
    Mar-09 8.451 1,000 118.3292    
    Apr-09 8.321 1,000 120.1779    
    May-09 8.269 1,000 120.9336    
    Jun-09 9.421 1,000 106.1458    
    Jul-09 9.478 1,000 105.5075    
    Aug-09 7.598 1,000 131.6136    
    Sep-09 8.471 1,000 118.0498    
    Oct-09 7.987 1,000 125.2035    
    Nov-09 6.958 1,000 143.7195    
    Dec-09 7.524 1,000 132.908    
    Total     1,444.334   1,409.774

    * These NAVs are assumed

    The table above clearly shows how your cost of purchasing the units of any fund comes down and how a sense of discipline is instilled while investing even when there are swings in the NAV due to volatility in the market.

    SIP leads the way

    A key lesson we can share with you here, to give you a complete overview as to why SIPs are beneficial, is the lesson of 'The Hare and the Tortoise'. We know how the smart Mr. Hare tried to mock the little Mr. Tortoise and challenged him to a race assuming he was bound to win thanks to his inherent speed; but once he sat back and rested, the little Tortoise soon overtook the overconfident hare and won the race. So dear investors, what we're saying is let's not get carried away by putting all our eggs into one basket, hoping that the goose will lay a golden egg. Instead, it's wiser to space out our investing into specific time frames which will benefit us in the longer run i.e. the systematic investment plan! 'Coz remember, slow and steady wins the race!

    And to help you get started on the right track, we suggest you sign up for The 5 Minute WrapUp (a free resource)

    Over the next few months we plan to cover a range of issues that are important to women and offer solutions for the same. If there is anything in particular that you would like us to cover, write in to us!

     

     

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