This three letter word - SIP has created wonders for millions of investors across India.Mutual Fund SIP accounts stood at 3.73 CRORE people ! And the total amount collected through SIP during March 2021 was ₹9,182 crore per month..whopping ! Isn't it ?
So first of all, let me clarify you – SIP is not the name of any scheme or product; it is a recurring method of investment or you can say it is just a synonym of ‘Recurring Investments’. So , to start a SIP, you need to first choose the Asset or Scheme or Product. Like- you can start SIP in Gold, Stocks, Silver, Bank FDs…….or Mutual Fund Schemes
SIP is the short form of ‘Systematic Investment Plan’; and in Hindi it is called as ‘ नियमित निवेश योजना’
The key word to note, is ‘Systematic’ – ‘Regular’ – ‘Discipline’ ! This word works as a wonder in all aspects of our life – like , Systematic exercise increases your strength, Systematic work increases your career success …and more
This word ‘Systematic’ plays very vital role in wealth creation too ! Today we will talk about this highly beneficial and popular investment method – SIP ( Systematic Investment Plan) . We will try to understand the core strength of SIP and learn about some Do’s and Don’ts to create big wealth though SIPs
And here comes the Key Question : “ Which Asset or Scheme or Product is the best for starting a SIP ?’
In order to answer this Question, we need to understand the basic working principle of a SIP. A SIP works on following four principles :
1. Regular Investing
2. Averaging of Purchase Cost
3. Accumulation of more and more units or shares of the scheme
4. Power of Compounding is applied on the accumulated units
For Point 1 , you can choose any Asset
For Point 2, you need the product which has some element of volatility; because non-volatile assets will not provide you any cost averaging. It sounds strange but is real – SIP works well with Equity funds, which are volatile and risky
For Point 3 , you again need to go with Equity assets; because you need the mark to market falls or discounts to accumulate higher units
For Point 4, you surely need to go with equity funds; because all your accumulated units will provide higher compounding benefits if there is any upsurge in the market price of those units
So summing up, you need a good Equity Asset to start a SIP. And we all know, an Equity Mutual Fund Scheme is much better than a single Equity Asset, for multiple reasons like- diversification, transparency, professional management etc.
So let us take a dummy example of SIP in two different type of schemes or products – one is high volatile and another is almost zero volatile. As you can see in the table below - although both the schemes NAV started at 11 and ended at 12 , however the Scheme 1 accumulated higher units due to volatility !
As you see, the scheme with higher element of volatility has accumulated higher number of units, and hence got higher advantage of compounding at later stage. Despite having same Start NAV and same End NAV, scheme 1 is valued at Rs 16,000/- as compared to Rs 13,000/- in Scheme 2. I am sure you will start loving volatility from now !!!
In order to get the best out of your SIP, here are some Do’s and Don’t for every SIP investor :
Always choose a well-diversified Equity MFs schemes for long term SIPs ( greater than 5 Yrs) and Stable Hybrid Funds for Short term SIPs ( less than 5 Yrs)
Always spread your SIP debit dates across the month like- 1st SIP on 5th , 2nd SIP on 10th, 3rd SIP on 15th etc . This will give you better opportunity to grab volatility and cost benefit
Must mark your Financial Goals with every SIP for better discipline in your savings – like, SIP for home renovation, SIP for Vacation, SIP for Marriage etc
Don’t choose sectoral funds or thematic funds , if you don’t know when to exit
Don’t stop or pause your SIP in falling market , because that is the best time to accumulate higher units
Never look at the current returns of your SIP , rather focus on the unit accumulation in your SIP. So please remember – higher the fall in NAV or price, higher will be your unit accumulation
So by now you have understood the basic concept of SIP. Now let me provide you some estimate on the future values of your SIP at different stage of your life. Here, I have taken an example of Rs 10000/- per month with 12% p.a of assumed returns. This return is just taken to reach to an estimate ( this should not be taken as any guaranteed returns or fixed returns by the readers) :
Finally, when you are all set to make SIP as your key wealth creation too, I would like to share one more point to make you understand the SIP well.
Have you ever seen the SNOW BALL phenomenon ? Under this phenomenon , the SNOW BALL becomes bigger and bigger as it falls down the hill. And longer it travels , bigger it becomes ! At time it becomes so big that it blows up the whole city .
SIP works on this same SNOW BALLtheory ! You keep accumulating the units of the MF schemes, regularly and as time passes by , your accumulation so big that even a small rise in NAV/ Price provides you huge cash flow. Like – assume you accumulated 50000 units of a scheme ABC Funds in 15 years. And lets assume your average accumulation cost is Rs 150/- per units.
When the ABC Funds NAV will rise by Re 1/-, you will get a cash flow of Rs 50000/- and at a rise of Rs 2/- per unit, you will get Rs 1 Lacs …and so on ! Isn't it amazing ?
So here comes the most special benefit of investing through SIP
“ Invest a Fixed sum every month for 8 - 10 -12 or 15 years and start getting a Fixed sum every month life time !”...yes that's the beauty of SIP ! You can achieve your Financial Freedom through this small but regular investment habit
This superb , safe and simple method of pension creation has helped lakhs of investors manage their post retirement requirements or any other cash flow needs. See the table below of assumed cash flow based upon the historic SIP performances ( please note that there is no guarantee that this will be repeated) :
So at the end , I am sure, you must have many questions : like -
What should be the ideal SIP amount ?
Which is the best SIP scheme to chose ?
How to spread my amount on monthly calendar ?
How does this pension planning or cash flow planning works ?
What is the liquidity , taxation or investment Risks ?
........and may be more ! No worry ! Either put your queries in the comment Box of this Blog or simply call at : 9886441717 . Or you can simply E mail at info@justinvestonline.com to book one to one counselling session. Mind it, we don't care about your investment quantum - our counselling session is same for every customer . So even if you wish to start with Rs 1000/- per month, we are here to help you.
Do contact us for any help or query : Chetan Jain : Managing Partner
#77/1, Ground Floor, Old post office Road, 2nd Block Thyagarajnagar, Bangalore: 560028
+91 9886441717
info@justinvestonline.com