Over the last two decades Mutual Funds have proved to be one of the best investment instruments for all age groups and classes of investors. The Assets under management of Mutual Fund schemes have grown from a few thousand crores rupees in the 1990s to over 17 lakh crores today. The tremendous and ever increasing popularity of Mutual Funds over the last two decades is because of the good returns it has generated for investors, along with safety of capital invested, provided the money is invested wisely. In this article we will be talking about the benefits of investing through SIP.
The returns generated by Mutual Funds are far superior to investments in Insurance policies, Fixed Deposits of Banks and several other asset classes of similar tenure. Care should however be taken while investing in Mutual Funds as these are market related investment instruments and as such investing without a proper understanding of how mutual funds and capital markets work can do more harm than good.
Here we try to highlight a very important instrument which is extremely useful while investing in Mutual Funds. It’s called an SIP, which stands for Systematic Investment Plan.
Investing through SIP simply means investing a fixed amount of money every month instead of lump sum investment. There are several benefits of investing through SIP.
First. It cultivates a habit of investing regularly. A fixed amount of money gets debited from your bank account every month, on a specific date without you having to do any paperwork, which is done only once while staring the SIP. This allows you to save a fixed amount every month and inculcates a disciplined saving habit.
Second. The money invested through SIP is used to buy mutual fund units. When the price of the underlying asset, i.e. shares or bonds are trading at high prices you get less number of units and vice versa. Thus the purchase price of units gets averaged out between bull and bear markets. You get more units when the market is trading at low valuations and vice versa. Over a period of time this results in acquisition of units at the best possible price. This is called Rupee Cost Averaging.
It has been generally observed that comparisons between lump sum investments and SIP investments in the same mutual fund scheme with the same plan, option etc., and the returns from SIP investments are far superior to lump sum investments.
Third. SIP done over a long period of time helps due to the power of compounding. The money invested grows faster as the months and years go by, because of the power of compounding. Hence it is advisable that you start investing through an SIP at an early age rather than starting late.
To understand this point better, let us assume that you start a monthly SIP of Rs.1000 in an equity scheme at the age of 25. Assuming an annualized return of 12 percent, over a period of 10 years this will have grown to Rs. 230,038. The same SIP would generate Rs. 989,255 in 20 years and Rs. 3,494,964 in 30 years.
Now let us assume that you start investing at the age of 35 instead of 25. But now, in order to catch for lost time you invest Rs. 2000 per month instead of Rs.1000. Let us see how much this SIP will generate over the next 10 and 20 years. The value of the monthly SIP of Rs. 2000 after 10 years will be 460,077 and Rs. 1,978,510 after 20 years at the same annualized return of 12 percent. Thus at the age of 55 you will have Rs. 3,494,964 if you start with an SIP of Rs. 1000 per month at the age of 25 and only Rs. 1,978,510 if you start at the age of 35. To save the same Rs. 3,494,964, if you start investing at the age of 35 you will have to increase the SIP amount to Rs. 3533 per month. This is because of the power of compounding.
Fourth. SIP allows you to invest any amount as per your budget and convenience. Most Mutual Fund schemes allow you to start investing with Rs. 1000 per month. You can also top up this SIP at regular intervals as your income grows over the years.
Fifth. SIPs are especially useful while investing at market peaks or when markets are overvalued as it reduces your exposure to the underlying shares or bonds when their prices are too high.
The SIP can be stopped at any time by submitting a SIP cancellation request at your Mutual Fund’s office or with an RTA like CAMs or Karvy, or by scheduling the cancellation of SIP at the time of initiating it. Finally the money can be withdrawn or redeemed when you need it, in part or in full, by submitting a transaction slip at your Mutual Fund’s office or with an RTA like CAMs or Karvy.
