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Why you should adopt the SIP route to investments? - Outside View by PersonalFN

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Why you should adopt the SIP route to investments?
Mar 24, 2011

Most mutual fund houses these days in an attempt to garner more AUM (Assets Under Management) are painting the city with appealing ads enticing you investors to invest your hard earned money in mutual funds through the SIP route. The newspapers too are carrying such ads to make a mass appeal. But while the marketing team of respective mutual fund houses are doing their job, it important to assess what SIPs are and how they can work in your favour in the long run.

What is SIP?

Well to put it in simple terms, SIP refers to a Systematic Investment Plan which is a mode of investing in mutual funds. Thus an SIP mode of investment in mutual funds is similar to the one followed while investing in a recurring deposit of a bank, where you deposit a fixed sum of money into your recurring deposit account, and enjoy a fixed rate of interest. But the only difference in case of SIPs is that, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes), and the returns generated for you by the respective funds are variable and are subject to market risks.

In case of SIPs, on a specified date a fixed amount as desired by you, is debited from your bank account (either through an ECS mandate or through post-dated cheques forwarded). And this is not it! You also have the flexibility to make your SIPs on a daily, monthly or a quarterly basis.

The amount so debited from your bank account is invested in the scheme(s) as selected by you for a specified tenure (months, years). This thus enables you to invest regularly and build wealth over the long-term.

Hence a SIP enforces a disciplined approach towards investing, and infuses regular saving habits which we all probably learnt during our childhood days when we used to maintain a piggy bank. Yes, those good old days where our parents provided us with some pocket money, which after expenditure we deposited in our piggy banks and at the end of particular tenure we saw that every penny saved became a large amount.

Today some Asset Management Companies (AMCs) / mutual fund houses also provide the ease and convenience of transacting online. They have set up their own online transaction platforms, where one can do SIP investments, through the IPIN (Internet Personal Identification Number) provided by the AMC and following the procedure as made available on their websites.

So, you have fewer hassles while investing as well as tracking your investment dates.

Moreover you have the under mentioned 4 good reasons for investing regularly through SIPs.

  1. Light on the wallet The SIP route enables you to invest in smaller amounts at regular intervals (daily, monthly or quarterly). This in turn reduces your burden of defraying a lump-sum at one go your bank account.

    So, if you cannot invest Rs 5,000 in one shot don't worry. You can simply take the SIP route and trigger the mutual fund investment with as low as Rs 250 per month. Mind you, a daily SIP is also possible (if you want to manage the volatility of the equity markets on daily basis).

  2. Makes market timing irrelevant

    Most of you investors try to time the stock markets; which in our opinion is a complete waste of time. Hazardous to your wealth as well as your health! Remember having a long-term investment horizon is the key to wealth creation.

    If market lows (as experienced during the turmoil of 2008 and early 2009), gave you the jitters and made you feel that you had never invested in equities, then SIPs would have been of help. Timing the markets, apart from requiring a full time attention also requires expertise in understanding economic cycles and market scenarios, which you may or may not possess.

    But, that does not necessarily make equities a loss-making investment proposition. Studies have repeatedly highlighted the ability of equities to outperform other asset classes (debt, gold, even real estate) over the long-term (at least 5 years) as also to effectively counter inflation.

    So, now one may ask if equities are such a great thing, why are so many investors complaining. Well it's because they either got their stock or the mutual fund wrong or the timing wrong. In our opinion both these problems can be solved through a SIP in a mutual fund with a steady track record, as the SIP route enables you to even-out the volatility of the equity markets effectively.

  3. Power of compounding

    Your regular investments through the SIP route will help your wealth grow by leaps and bounds. So, say you start a SIP of Rs 1,000 today, in a mutual fund scheme following prudent investment system and processes, with a SIP tenure of 20 years.

    Source: PersonalFN Research

    You will be amazed to see that your small savings of Rs 1,000 has grown into a huge corpus of over Rs 15 lakh in 20 years (assuming a modest return of 15% p.a.)

  4. Rupee cost averaging

    In order for you to absorb the shocks of the volatile equity markets well, SIP works better as opposed to one-time investing. This is because of rupee-cost averaging.

    Under rupee-cost averaging you would typically buy more of a mutual fund unit when prices are low and similarly buy fewer mutual units when prices are high. This infuses good discipline since it forces you to commit cash at market lows, when other investors around you are wary and exiting the market. It also enables you to lower the average cost of your investments.

    Source: ACE MF, PersonalFN Research

    So the next time you plan to do any mutual fund investment, be smart and adopt the SIP route to keep your financial worries at bay.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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