Friday, 10 February 2012

SIP : - Invest The SIP Way.

Two most challenging stuffs in stocks world is “Entry” and “Exit”.  If you can master this, you will be able to make enormous wealth. The word that is commonly used in stocks world is “Timing”.  Every analyst or stock Guru advises the individual investors “Don’t try to Time the Market”.  Time constitutes of when to enter and when to exit.
Systematic Investment Plan (SIP) is the right tool that will help you tide over the volatility and eliminate the element of market timing.  SIP helps you with disciplined investing irrespective of state of the market.SIP investment can be as low as 500 Rs. This gives opportunity for small investor to invest into stock market.

Starting a SIP for your fund is very simple: All that you need to do is choose one of the dates for your investment. (Fund houses usually have few options like 1st, 5th, 10th, 25th, 28th or so..). Give a standing instruction to your bank and that’s it!!!. Every month SIP amount is deducted from your bank account and units are purchased for you.
Off late, Fund houses have come up with innovative ways of SIP.  Fund house have now various options in SIP with frequency ranging from Daily SIP, Weekly SIP, Fortnightly SIP, Quarterly SIP, Flexi SIP.
Monthly SIP:  I call it OLD is GOLD method. Every month on date chosen by you, SIP amount gets deducted from your bank and units are purchased for you.

Daily SIP: Here money is invested to buy Mutual funds on a daily basis. This might appear to be perfect averaging method. In reality this is more of SIP Over Dose. Monthly SIP seems to be more appropriate.
Flexi-SIP: This is not offered by fund houses but fundsindia offers this feature. This feature definitely gives more flexibility; however retail investors who don’t have understanding of market basics should stick to traditional SIP.

Here are the details for Flexi SIP- Source FundsIndia
With Flexi-SIP, an investor can choose a mutual fund scheme, a regular investment amount, and a monthly investment date like for any other SIP. However, the investor will also choose a maximum investment amount. This maximum amount can be as high as 10 times the regular investment amount. The ECS mandate for bank debits will be issued for the maximum amount to complete the Flexi-SIP setup.

After this, every month, the investor will have the flexibility to set the value of SIP for the next installment. This value can be any amount between the minimum required SIP amount for that scheme and the maximum set by the investor. The current month investment will be made for that amount. 
It is, however, not absolutely necessary for the investor to set this value every month. If they do not do anything, the regular amount will be invested like any other SIP. So, the investor get both the benefit of hands-off investment of SIP as well as the flexibility to change the value if they so desire.
To illustrate, if the investor chooses a scheme for which the minimum monthly SIP installment required is Rs. 1000. The investor can set a regular SIP amount of, say, Rs. 5000 and a maximum of, say, Rs. 10,000. Let's assume the SIP date is the 10th of every month.
The Flexi-SIP process will work this way:
1. The ECS mandate will be issued for Rs. 10,000
2. Every month, until seven days before the date of SIP (in this example, until 3rd of every month), the investor can login to the     system and change the value of next installment.
3. The value can be anywhere between Rs. 1,000 and Rs. 10,000.
4. If the investor does nothing, the investment amount will automatically be set at Rs. 5,000.
5. After every installment, the SIP amount will go back to the regular amount for the next installment(s).

Take away: It is the period of the SIP that plays a vital role in wealth creation and not the type or frequency of SIP. Once you start off, you should continue your SIP as long as you can. Analysts suggest your timeframe should be at least 5 to 10 years.
If Rajesh had started SIP on 1st Jan-2000 and continued till 1st Jan-2012.  His SIP of Rs 1000 in HDFC Top 200 would have given him CAGR of 23.64%.  This means 1,45,000 Rs invested in form of SIP would have grown to 6,72,841 Rs.   Absolute Returns of 364%
In case if Rajesh had delayed his investment and started off on 1st Jan-2004. The same fund would have given him CAGR of 17.45%. This means 96000 Rs invested in the form of SIP would have grown to 194510.  Absolute Returns of 102%
If we observe returnsIt clearly indicates that SIP works better when invested for longer period. I reiterate it the period of the SIP that is more important than the Type or frequency of the SIP.
Do you agree that SIP is the best tool for investors to make money in stock market?


indianist said...

Sir I invested a big amount in single plan now i understood Systematic investment plan. I am going to separate the amount and invest in mutual fund thanks for the information.....

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