SYSTEMATIC INVESTMENT PLAN

What is SIP ?

A Systematic Investment Plan (SIP) lets you invest in small amounts in mutual fund o a regular basis. It gives you a lot of flexibility and is a very convenient way of building a large corpus over a period time. In mutual fund terminology, SIP allows the investors to invest a fixed amount every month or quarter for purchasing additional units of the scheme at NAV based prices.

Also, your investments benefit from rupee-cost averaging. Let us explain it. If you invest an equal amount of money every month in a mutual fund, you are engaging in rupee-cost averaging. Share prices change from day to day, so the set amount of money you invest buys different amounts of shares every time. When prices are high, NAV is high - so you get less. And when prices are low, NAV is low - so you get more. In the end, if you were to buy all units at once you risk getting less your money. If you are lucky enough, you would get more. But for that you would need to be an expert. So, in the interest of an average investor, a SIP ensures that the chances of losing out o an investment are spread out and thus minimized.

Let's take an example. Suppose an investor Rs. 1000 under the Systematic Investment Plan on a monthly basis. Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market has turned downwards.

So, how does a SIP operate?

An investor can invest a fixed amount every month for at least 6 months or more through post-dated cheques or through auto debit facility in select centres. Investors are adviced to indicate their choice on their application form in the box provided for the purpose. The post-dated cheuqes should be dated the 5th/ 15th/ 25 of every month. This will make it easy for you to keep a track of your regular contributions.

• It's an expert's field. Let's leave it to them
  Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy - thus ensuring informed investment.
  
  Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative.
  
  
• Putting eggs in different baskets
  Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us.
  
  Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.
  
  
• It's all transparent & well-regulated
  The mutual fund industry is well regulated both by SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India). They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry.
  
  This makes it safer and convenient for investors to invest through the mutual funds.
  
  
• Market timing becomes irrelevant
  One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of 'where' to invest, SIP helps us to overcome the problem of 'when.'
  
  SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go.
  
  With the next 2-3 years looking good from Indian economy point of view, one can expect handsome returns through' regular investing.
  
  
• Does not strain our day-to-day finances
  Mutual funds allow us to invest very small amounts (Rs 500-Rs 1,000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
  
  
• Reduces the average cost
  In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging.
  
  Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy
  
  
• Helps to fulfill our dreams
  The investments we make are ultimately for some objectives such as to buy a house, children's education, marriage etc. And many of them require a huge one-time investment.
  
  As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.
  

• Investment in equity mutual funds or unit linked insurance should always be done in SIP mode:
  I remember in 1999 when Templeton Mutual fund would talk about SIP the market looked at it skeptically. And it took a lot of convincing for customers to accept it. Now, life has come a full circle. Everybody wants to (always) invest using an SIP. If you have the maturity and calmness to realize that equities are for the long term and are willing to give your funds about 10 years, and you have a lump sum, you can afford to give the SIP route a pass. However, if your horizon is less than five years, you must do an SIP
  
  
• I do rupee cost averaging in a single equity that is a kind of SIP is it not?
  This is a question I face every day. No, a rupee cost averaging in a single scrip cannot be equated to an SIP. When the market brings down the price of a single scrip, it is giving you information. You need to react to that. Let us take two examples - Lupin Laboratories - has moved from a high of Rs 700 to Rs 100 and back to Rs 700. The question to ask here is not whether an SIP would have worked. The question to ask is whether you would have had the stomach to continue the SIP through this period. Silverline Technologies moved from Rs 30 to Rs 1300 to Rs 7! In this case, if you had started an SIP at a price of Rs 1300, today you would be licking your wounds. SIP works in a portfolio, not in a single scrip.
  
  
• You cannot invest a lump sum in the same account in which you are doing an SIP:
  Many people assume that if they are doing an SIP in a particular fund, and suddenly they have a surplus, they cannot put that lump sum in that account. Fact is, in case you are doing an SIP of Rs 10,000 per month in an equity fund, and suddenly you have a surplus of Rs 100,000 and clearly you have a 10-year view on the same, then you can just push it into your SIP account. SIP is just a payment mode, not a scheme!
  
  
• If I miss investing for a particular month, will they prosecute me?
  Now, this is the fear of EMI that people have. In an SIP you are buying an investment every month (or quarter), there is no question of prosecuting you for missing one investment. As a matter of discipline, you should not miss any month; however, missing one month's investment is not a crime!
  
  
• When you have a surplus (accumulation stage of your life) you should do an SIP and during retirement you should do a SWP:
  No. You should ideally keep your withdrawals only from an income fund or a bank fixed deposit. You should sell an equity fund on some other basis, say deciding to sell 20 per cent of your portfolio in a year so that the return is 4 times the 30 year historic return. SWP, by definition cannot work in an equity fund.
  
  
• SIP works for everybody, but does not work for me:
  Another myth. SIP works in a well-diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a good fund or are looking at a 12 month horizon.
  
  
• SIP is only for small investors:
  Nothing can be farther from the truth. I have a client who has invested Rs 32.66 lakhs using SIP, starting from January 1998 till date. Obviously, he has invested much more in later years as his income went up and the funds together are worth Rs 97 lakhs (Rs 9.7 million), substantially higher than his provident fund.
  
  
• Market is at very high level to start an SIP:
  I have heard this when the index was 3000 also. I have no clue where the market is headed, but I know SIP works!
  
  
• All fund houses are now charging a full load on the SIP, so now SIP will not work Why not time the market?
  Introducing an entry load was expected to happen and it has happened. What actually hurts the retail investor is the asset management charges 2.5% in most cases is a bigger threat to compounding!
  
  
• If I do an SIP in a tax plan, can I withdraw all the money on completion of 3 years?
  Another regular question almost! Every installment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules, which say that a tax saving scheme should have a 3-year lock-in. You cannot escape that by doing an SIP!