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Systematic Investment Plans - Mutual Funds SIP
Systematic Investment Plans (SIPs) are an alternate means to invest in a mutual fund. When you choose to invest via SIP, you invest in smaller denominations at regular time intervals as opposed to making a single lump sum investment.
- They help you invest and save in a regular and disciplined manner. SIPs offer the convenience of direct debits from your bank account through ECS, so you need not worry about missing the investment date.
- With SIPs you invest regularly through the market swings and gain the advantage of rupee cost averaging. Simply understood, you average out the cost of buying mutual fund units over months/years.
- They are likely to have either low or no entry and exit charges when you purchase and sell the units.
- They are a great way to start saving for your dreams. Small investments starting early in life compound over time to create a secure nest egg.
- Buying mutual fund units over a period of time via SIPs allows you to average the cost of purchase and gives you better returns effectively, eliminating the need for timing your purchase.
- You should keep a periodical tab on the SIP's performance vis-a-vis the benchmarks and other schemes to keep track on the profitability of your investment.
- The key to formulate an exit strategy is to remove profits when you archive a targeted percentage.
- Avoid waiting to sell all units at a desired event date (e.g., higher education of your child) as the market condition may not be favourable at that time.
Below is the performance of SIP over different periods based on the Franklin India Index Fund NSE Nifty Plan (G):
|SIP||Jan 2001 - Jan 2008||Jan 2001 - Jan 2008||Jan 2004 - Jan 2008||Jan 2004 - Jan 2008|
|Date of first investment||1-Jan-01||1-Jan-01||1-Jan-04||1-Jan-04|
|Time period||7 years||8 years||4 years||5 years|
|Amount per investment||Rs. 1000||Rs. 1000||Rs. 1000||Rs. 1000|
|NAV as on investment date||9.44||9.44||14.55||14.55|
|No of units||6649.97||7008.77||2384.1600||2742.96|
|Date of redemption||1-Jan-08||1-Jan-09||1-Jan-08||1-Jan-09|
|NAV as on redemption date||48.66||23.88||48.66||23.88|
|Total value on redemption||323587.54||167369.43||116013.23||65501.88|
The above example shows that:
- Entering early in SIP may not necessarily yield higher returns. This is clear from the fact that the returns generated in Column 1 (entry January 2001) are less than the returns generated in Column 3 (entry January 2004). This is because the level of market at the time of entry and prior to that affects the returns generated.
- Early exit from an SIP can make a difference to the returns. In the above example, as the exit in columns 1 and 3 have been made at market highs, the returns generated are higher than those generated in columns 2 and 4. The reverse could also be true if the markets had risen between January 2008 and January 2009.
Hence, timing the exit plays a pivotal role in SIP.
Like SIPs, Systematic Transfer Plans (STPs) and Systematic Withdrawals Plans (SWPs) are a way of transferring money rather than an alternate means of investments. STP is a transfer of a fixed amount of money into another fund or scheme at periodic intervals. While SWP allows partial or full redemption of units at the occurrence of certain events.
For ease of keeping track of timing the transfer of funds, mutual funds offer you a trigger facility. To use this facility, you need to specify the event, the amount or the number of units to be redeemed, which ensures that you book some profits and maintain the desired asset allocation in the portfolio.
The trigger could be:
- the value of the investment;
- the net asset value of the scheme;
- level of capital appreciation;
- level of the market indices; or
- a particular date.