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'I would like to invest in an SIP, can you suggest one?'
'What is an SIP?'
'I would like to invest in a fund. Is SIP good?'
So we decided to explain in detail what we mean by SIP.
First, let's state upfront that an SIP is not a mutual fund; it is a method of investing in a fund. An acronym for Systematic Investment Plan, it requires you to make fixed payments at fixed dates. Whatever is the Net Asset Value or NAV that day, you pay that price. In other words, you systematically invest in a fund.
Let's try and understand this with the help of an example. Let's say you have decided to invest in mutual fund Prudential ICICI's growth plan. You've chosen to invest through the SIP option for a period of one year.
Fund: Prudential ICICI Growth Plan
You invest: Rs 1,000 every month
Investment date: June 2005 to May 2006
|
Date |
NAV |
Approx number of units you will get for Rs 1,000 |
|
Jun 7 |
46.29 |
21.603 |
|
Jul 7 |
48.08 |
20.799 |
|
Aug 8 |
52.78 |
18.947 |
|
Sep 8 |
56.36 |
17.743 |
|
Oct 7 |
58.42 |
17.117 |
|
Nov 7 |
56.42 |
17.724 |
|
Dec 7 |
62.14 |
16.093 |
|
Jan 9 |
67.58 |
14.797 |
|
Feb 7 |
71.70 |
13.947 |
|
Mar 7 |
76.19 |
13.125 |
|
Apr 7 |
83.97 |
11.909 |
|
May 8 |
89.92 |
11.121 |
Amount invested: Rs 12,000
Number of units accumulated: 194.925
Average cost of each unit: Rs 61.5621
This example has not taken into account the cost of entry or exit load.
1. SIP is great because you might have not had Rs 12,000 at one go to invest. Hence, distributing it over time is a good option.
2. It makes you disciplined in your investing because you are forced to invest Rs 1,000 every month. This money can be automatically debited from your bank account and credited directly to the fund of your choice.
3. Over time, the average cost you pay for the units evens out. When the cost is low, you get more units. When it is high, you get less. In the above example, the average cost per unit was Rs 61.56.
4. The longer the time frame, the better the SIP.
In the above example, you eventually landed up with 194 units. It is obvious you would have benefited most if you invested Rs 12,000 on June 7 itself. Then, you would have got 259 units.
If you had invested on November 7, you would have got 212 units.
But, had you invested on March 7, then you would have got just 157 units.
The truth is, none of us can time the market. No one knows when a fund's NAV will rise or fall.
That is why, to get the maximum benefit of an SIP, you must stay at it for at least three years. This enables you to capture all the lows and highs of the market and the average price you pay per unit falls.
If you had invested in the SIP for two years (June 2004 -- May 2006), you would have invested a total of Rs 24,000 and accumulated 510.905 units. In this case, the average cost per unit would drop to just Rs 46.9755.
Now SIPs are more expensive
Earlier, funds would not even charge a load when investing in an SIP. Over time, though, they have started doing so.
Mutual fund research outfit Value Research did a study on the impact of a load on SIP. HDFC Equity Fund was taken as an example and two loads were looked at: 1% and 2.25%.
Fund: HDFC Equity Fund
Monthly SIP: Rs 10,000
Calculations are as per data on May 31, 2006
3-year SIP
|
Entry load |
Return (%) |
Value (Rs) |
|
Nil |
48.52 |
6,79,922 |
|
1% |
47.67 |
6,73,190 |
|
2.25% |
46.64 |
6,64,960 |
5-year SIP
|
Entry load |
Return (%) |
Value (Rs) |
|
Nil |
52.50 |
20,28,317 |
|
1% |
52.03 |
20,08,235 |
|
2.25% |
51.46 |
19,83,684 |
10-year SIP
|
Entry load |
Return (%) |
Value (Rs) |
|
Nil |
38.46 |
90,78,587 |
|
1% |
38.28 |
89,88,700 |
|
2.25% |
38.04 |
88,78,814 |
The longer the investment term, the greater the impact of a higher load.
Earlier, you would only pay a load on a one-time investment, now you pay it every month on a smaller amount.
All said and done, though, the SIP is still the best way to enter a mutual fund.
All data supplied by mutual fund research outfit, Value Research.