By now, you must be tired of hearing me say why everyone should invest in equity – stocks and mutual funds. Investing in the latter is best done by something called SIP.
If you were to take the usual more often followed route to riches in the stock market, you would probably try to time the market to buy low and sell high in order to make money. However, that is something which we can seldom achieve successfully. Timing the market is strict no no.
The only best way to invest in the stock market is through the SIP or systematic investment plan route of mutual funds.
What is Systematic Investment Plan or SIP ?
This is a method of investing in the stock market by buying mutual funds units – you commit to invest an amount systematically over a period of time instead of investing the money as a lump sum.
It is not an investment avenue and it can be used only with mutual funds. By investing in the SIP way, you don’t care where the stock market is going – up or low – you automatically buys more units of the mutual fund when the stock market is low and less units when it is high. This averages out the cost of purchase – you buy more units when the price is less and less units when the price is more. This concept is called rupee cost averaging.
Let us see with an example how this works.
Consider two investors who want to put in Rs 24,000/- into mutual funds and cash out at the end of 12 months. The ordinary investor decides to put in his money just once in the beginning and cash out at the end of the 12th month. The smart investor, on the other hand, decides to invest systematically the Rs 24,000/- he has. He decided to put in Rs 2,000/- each month into the mutual fund over the next 12 months.
Now the NAV of the mutual fund is going to vary each month in the year of consideration. Let us take a hypothetical varying NAV and check the results.
At the end of 12 months, the ordinary investor has 2400 units and since the NAV of the mutual fund is 11 at the end of the 12th month, his current market value will be Rs 26,400. However, the smart investor has more number of units with him – 2538.91 and at an NAV of 11, his current market value works out to be Rs 27,928.91. Look closely at the varying NAV of the mutual fund and how the units purchased are more when the NAV is less and how the units are less when the NAV is more. The smart investor has more money and has taken less risk to achieve it !
Advantages
Following are some of the advantages of SIP.
- They enforce regular disciplined investing in you. You set up the SIP and forget about it. You do not even need to know when the amount is going to be debited from your bank account.
- Rupee cost averaging ensures that your purchase price is less and your risk is minimized. So you don’t have to time the market and lose your shirt.
- SIPs can be started with small amounts, as low as Rs 100/- a month. This ensures they are easy to invest in.
- You can stop, start or modify your SIP anytime.
Image from rediff.com
Other points to keep in mind :
- SIPs fail in an all time rising market. What this means is that if the market were to go up continuously, then investment via the lump-sum route will be better than investing in the SIP way. But the market, over a long period of time, has never consistently gone up or either down – it has oscillated up and down. So for investors, SIP is still the best way to invest.
- A SIP in a badly managed fund will not make you rich – remember that this is a means of investing in the stock market. You need to still pick the right mutual fund and invest in it systematically to make money.
I am a great enthusiast of mutual funds and the SIP investing style it offers. Investors should use it to their advantage. Sure, it does not offer the kick direct stock trading offers, but investors have to decide what’s important for them – the adrenalin rush of direct stock trading with a huge probability of losses or the passive sure shot way to riches style that SIPs offer.
Thanks for the example. Will this be the case always – that SIP returns more and lumpsum does not ?
@Jigar, Not in the case of rising markets though as explained.
Can one really modify SIPs after you start them ?
@Debu, Yes, you should be able to modify them.
Can you suggest some MFs in which SIPs will work better ?
@kookie, SIPs will work better in all MFs. Its not that they work better is some and won’t in others.
Hello Sir,
Superb article.Can you please suggest some Good SIP plans to invest.I am eagerly waiting for a elaborate article on SIP.
Thanks & Regards,
Ravi Shankar
@Ravi Shankar Kota, I will do that Ravi.
Hi Ravi. You can find a detailed article on SIP at http://insight.banyanfa.com/?p=95
suppose i am paying every month through cheque, i happens that i am not able to pay in one month, will there be any penalty in next month or my SIp will discontinue? can i stop my SIP at any time and start any time?
@nitin prakash, There is no penalty. Your SIP for that month will not execute and it will re-continue from the next. You can stop and start anytime but some AMCs want you to invest a minimum amount over some months (say Rs 5000 over 6 months) and if you stop before that, there could be a penalty. So this is not a standard process.
suppose i miss SIP in one month shall i need to play double in next month? it appears from your earlier reply that there is not much discipline in SIP, i mean one can drop to invest in some of the months and as and when one can stop and start without penalty, then let me know how is SIP different from lump sum investment with additional purchase say 5 to 6 times in a year in same folio? in later case i have more flexibility regarding amount, no of additional purchase and date and time of investment. please clear my doubt so as to enable me to secide between SIP and lumpsum.
@nitin prakash, You do not need to pay double next month !! If in each month you have committed to pay Rs 2000 and you miss one month, then next month you DO NOT have to pay Rs 4000, it still is Rs 2000. You can also stop and start anytime. So yes, you have more flexibility. But as I said earlier, check with the AMC first to make sure that you meet the minimum investment criteria to avoid penalty.
In my example above I have explained the difference between lump-sum and SIP investment. SIP is 100 times better than a lumpsum investment. So go for SIP each month.
Hi,
I want to invest 8,000 Rs. per month in 4 differnt MFs route by SIP.Could you suggest me best 4 SIP MFs name.
@Peeyush Mishra, What is your time horizon ? What are you saving for ?
@Radhey Sharma,i want to invest for long term(approx 20 years).
@Peeyush Mishra,
Try the following :
DSPBlackrock Top 100
Franklin India Bluechip
HDFC Top 200
Sundaram Select Mid Cap
Systematic investment plan is one and major way to create wealth. Equity investment is main for wealth creation. And SIP is a vehicle for this. Here you don’t have to time the market and have an advantage of rupee cost averaging. I read an good article in a website called http://www.want2rich.com. I am sharing the link: http://www.want2rich.com/2011/05/personal-finance/the-power-of-systematic-investment-plan/ . It can be helpful for you.
I have started investing in 2 mutual funds using SIP- (1) Reliance Regular Savings Fund & (2) Miracle asset India opportunity. I will invest 2 thousand every months for the next 5-10 years. How is my investment? Should I continue?
@Gautam Prashant, How did you choose these funds ? Did you do some analysis ?
Hi,
The agent through which I started investing into the mutual funds asked me to invest in those funds. I never did any analysis on my own as this is my first experience with the SIp ( and mutual funds). Please let me know the review for the same.
Thanks
Hi,
I am new to MF investing options. I would like to invest 1500 each month. Here are my Qs –
1. Should I invest 1500 in one MF or 500 each on 3 different top MFs in order to expect more gain since I plan to invest for 3 years at least.
2. How do I choose a good MF, SBI, Fracklin, HDFC, ICICI… there are many more options..being a novice I am confused.
3. Is there a lock-in period?
4. What are NAVs and how should I relate that to MFs.
I am sure you would have answered all of the above in different sections, however, I am a school teacher who needs in simpler terms (with illustrations if possible) to understand.
HOW IS NAV CALCULATED ON THE AMOUNT INVESTED EVERY MONTH.?
@SHRUTI, Wrote this just for you :
https://www.thewealthwisher.com/2011/09/13/how-is-mutual-fund-net-asset-value-nav-calculated/
Very good article. I have also attempted to write an article on SIPs at http://insight.banyanfa.com/?p=95. You can contact us on http://www.banyanfa.com.
Regards
Banyan Financial Advisors
Hi,
I am currently running a SIP of Rs.2000/- pm in UTI Opportunities fund since last 1.8 Years but till now i am not being able to find it suitable in terms of return. Can you please suggest whether i should continue it or should i stop and start investing in any other MF’s. Same case is also for Reliance Regular Savings Fund. Waiting for a suggestion from your end.
@Suhartha, It is a very very good fund. Continue.
Hi,
Thanks for the reply against my previous query. This time can you please suggest me any good mutual fund where i can start a new SIP of Rs.1000/- pm?
How are the gold related funds. Please suggest.
@Suhartha,
What is the time duration of this new SIP, what is your risk appetite?
Radhey has written some excellent articles on Large, Mid & Small cap MF to invest in. Kindly go through it and decide which suits you.
https://www.thewealthwisher.com/2012/01/08/3-best-large-cap-mutual-funds-to-invest-in-2012-in-india/
https://www.thewealthwisher.com/2012/01/11/4-best-large-and-midcap-mutual-funds-to-invest-in-2012-in-india/
https://www.thewealthwisher.com/2012/01/13/best-mid-cap-small-cap-multi-cap-mutual-funds-to-invest-in-2012-in-india/
@Rakesh, Thanks Rakesh.
@Suhartha – Gold MFs are very good as well. Try Gold ETFs.
After we apply to Stop SIP , how many days they need to stop.I have applied 2 months ago but still they are deducting money through ESC.
@Vinay,
That’s strange. It usually takes less than a week. You should follow-up immediately with the fund house.
It did not get stopped so do check again !
Hi,
Thanks for such a good article.
It is adviced that the investment in mutual funds thru SIP, should be goal oriented.
I want to start a SIP, for Rs 2000 initially. I am planning to increase SIP amount after 6 months.
My goal is to build retirement corpus of XYZ amount in 15 years time.There are many SIP calculators avaible in the market, which give the future amount . Here we are asked to insert the expected rate of return in % . My question is
1)what can be the average expected rate of return from a equity based mutual fund for 15 years horizon.(Please suggest rate for sake of calculation.I know that it may vary in future).
2) What is difference between CAGR and actual rate of return ?
Is CAGR and IRR same thing ?
3) Also suggest please share SIP calulation formulas or calulator. there are many on the internet , which add to confusion as non of the results match each other
1) For calculations you may take 15% as expected rate of return if you are planning to invest in equity. If you are planning to invest in debt you may take 9% as expected rate of return. On an average and being on conservative side you may take it as 12%.
2) I am not too sure about this but from what I have read and understood IRR is the annual rate of return you will get on your investment. CAGR does the same but takes the effect of compounding into consideration as well.
3) What do you mean by SIP calculation formula/calculator? You may try looking here: https://www.thewealthwisher.com/thewealthwisher-personal-finance-calculators/
@Minu,
15% can be achieved if you invest in good diversified MF, but i will go with Vivek on more realistic levels of 12%.
There is vast difference between CAGR and IRR –
CAGR or Compounded Annual Growth Rate refers to the growth in numbers, business.
IRR Refers to Internal Rate of Return – which means the rate of return on the funds lent or deployed after making some internal adjustment.
IRR and CAGR are not the same.
Can you please clarify the difference? It’d be good to learn from a subject matter expert.
Hi, i have the following questions regarding SIP :
1) I have an SIP in HDFC. For some reason I wish to STOP the SIP. It has been 24 instalments since it started. It is a 36 instalment SIP. Will nay penalty be levied on me? How much?
2) After doing the above, if I wish to redeem the amount now itself, will any penalty be levied on me? How much?
Thank you for your time.
Also, can you give your view on the market condition. Do you think the market can expect an upward surge in the short run? My SIP is 8% negative right now.
Please give your valuable advice.
Hi Anukh,
You may want to refer to the article link mentioned in one of the response above (http://insight.banyanfa.com/?p=95). Specifically, my responses to your query are :
1. There are no penal charges to stop a SIP – this makes it one of the most flexible investment options available.
2. You can redeem your Mutual funds invested via SIP at any time. Any units procured within last 1 year would generally attract 1% exit charge on the current value of the units which would be deducted from the redemption proceeds. Units purchased before 1 year would not attract any such charges. I have just been informed that some AMCs are not planning to increase this duration of 1 year to 15 months.
In short run – to be frank I don’t hope the markets to make a jump upwards. Rather, it may tank more. It is unfortunate that at this time you have to stop your SIPs when they would give you the best contribution towards getting more units at a cheaper price !
My suggestion, if you can, continue with your SIPs, atleast for another year which would give you an opportunity to buy units at a low price. If you can’t wait due to personal reasons, then better exit right now to avoid further downside in the short run.
Regards
BanyanFA
Top notch BFA !
Guys, please set your expectation right. SIP not always gives a guranteed return. For last 2 and half years, an SIP in HDFC Equity for 10000/month has yielded only 4% absolute return. Quite bad. Given the details below so that you understand. In this case had I invested the lumpsum on 5th April 2010, I would have got 12% absolute return. May be something to do with HDFC Equity.
SIP Date Sip Amount Mkt Value as of 30th Oct 2012 Loss/Gain Absolute Return ARR
5-Apr-10 10,000 11,252 1,252.08 12.52% 4.68%
5-May-10 10,000 11,297 1,296.75 12.97% 5.01%
7-Jun-10 10,000 11,308 1,307.65 13.08% 5.24%
5-Jul-10 10,000 10,871 871.23 8.71% 3.65%
5-Aug-10 10,000 10,192 191.81 1.92% 0.85%
6-Sep-10 10,000 9,667 -333.14 -3.33% -1.56%
5-Oct-10 10,000 9,057 -942.82 -9.43% -4.66%
8-Nov-10 10,000 8,684 -1,316.04 -13.16% -6.87%
6-Dec-10 10,000 9,085 -915.3 -9.15% -4.91%
5-Jan-11 10,000 9,236 -764.38 -7.64% -4.26%
7-Feb-11 10,000 10,190 189.91 1.90% 1.09%
7-Mar-11 10,000 10,253 253.38 2.53% 1.52%
5-Apr-11 10,000 9,484 -516.21 -5.16% -3.30%
5-May-11 10,000 9,933 -66.71 -0.67% -0.45%
6-Jun-11 10,000 9,822 -178.13 -1.78% -1.27%
5-Jul-11 10,000 9,631 -369.37 -3.69% -2.79%
5-Aug-11 10,000 10,216 216.06 2.16% 1.73%
5-Sep-11 10,000 10,878 878.04 8.78% 7.53%
5-Oct-11 10,000 11,562 1,561.55 15.62% 14.43%
8-Nov-11 10,000 10,646 646.49 6.46% *
5-Dec-11 10,000 11,288 1,288.31 12.88% *
5-Jan-12 10,000 12,081 2,080.78 20.81% *
6-Feb-12 10,000 10,546 545.69 5.46% *
5-Mar-12 10,000 10,499 498.83 4.99% *
10-Apr-12 10,000 10,512 511.64 5.12% *
10-May-12 10,000 11,235 1,234.91 12.35% *
11-Jun-12 10,000 10,986 985.92 9.86% *
10-Jul-12 10,000 10,391 390.95 3.91% *
10-Aug-12 10,000 10,755 755.45 7.55% *
10-Sep-12 10,000 10,669 669.1 6.69% *
@Raja,
Do note that investment in equity is for a long term, don’t expect fireworks in short-term.
Do calculate returns for 10 years and compare.
Hi, I wish to invest in ELSS via SIP. In 3 years, will my money really grow or any other method (like sip without elss or gold etf) will give me better returns in 3 years ? I will invest in good large cap, mid cap and small cap funds which are recommended. 3 years is ok ?
@Santosh,
Do you want to invest in ELSS for tax savings? Investing via SIP is a good option. Remember investment in equity is for long term, 3 years is less to compare but in 5 years you can expect decent returns.
I want to start sip now, I can start with 5000, please suggest good sip, is axis long term equity fund is good? want to save some tax also
Dear Ajay,
Good that you are interested in SIP. The fund you have chosen is a does not have a very long record as the AMC is comparatively new. But looking at its other funds and management its ok. You may also try Birla Sunlife Tax Relief, Reliance Tax Saver who have 10 years plus track.
Please remember SIP should be done taking a goal in mind, and for this, you should have a financial plan. Driving blindfold is dangerous. The financial plan takes care of your goals and events like tax-planning etc. Happy Investing.
Hi…I found the article very useful as I’m a beginner in the world of investment.. I want to invest 15000/month in 2 or 3 SIPs for atleast 10 years..I am a doctor by profession and I’m 29 yrs old.. Can you suggest me which SIPs should I select??
Dear Dr. Priyan… Thanks for liking the article. I can give you random names of the fund, which I will, but I would recommend that you go for Financial Planning first. Financial Planning ensures that your goals are finalized, your risk tolerance is assessed and accordingly your portfolio is constructed using the model asset allocation. Also, your current investments and behavior patterns are also discussed and you have a workable strategy for your financial life. Without these, the random investments will be liking driving without vision. You may go to our website and find a lot of articles on financial planning and its importance.
As I said, I don’t know whether you understand equity and have an appetite for it, but assuming you do, you may try SIP in DSP Blackrock Microcap Fund, Birla Frontline Equity Fund and ICICI Prudential Focused Bluechip Fund.