A beginner's guide to investing in SIPs

Taking the first step is always difficult!

Not many of us were thrilled at going to school as kids. The transition from college to the professional world isn't easy too, albeit it brings to you the financial independence. Likewise, the world of investments is quite complicated at first, with all the jargons and technicalities. The news of a corporate scam or financial fraud further adds up to the anxiety levels.

All said and done, India has one of the healthiest savings rate in the world, at around 35 per cent. Yet, we are a country of people with limited exposure to capital markets.

Disclaimer: This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients.

Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Starting with SIP

A systematic investment plan is the basic step towards creating wealth for you and your family.  Whether you are a beginner or a sophisticated market player, even if the market is at an all-time-high or at rock bottom, the SIP is a disciplined approach to investing. Quite similar to the recurring deposit that we used to hold in our bank.

The biggest advantage of SIP is that one can start it with a low-ticket size. Even with Rs 100, you can build the corpus.  Of course, as your financial needs increase, so should your monthly investments to meet the desired goals.

You could choose a large cap equity mutual fund with a proven track record. All mutual fund houses publish a monthly factsheet on their web site. Check for CAGR (Compounded annualised growth rate), that is, performance over a period of time.

Plus, there should be no major fund manager exits for the mutual fund house in the recent period. The fund manager should be managing the assets at least for a period of 2 to 3 years.

Rupee cost averaging

Rupee cost averaging is defined as a constant investment into a fund at predetermined times such that the investor purchases more units when the price is low and less when it is high.

What this simply means is that you start a systematic investment plan (SIP) with a mutual fund and you devote a fixed rupee amount towards purchasing the units every month (or week, or quarter, whatever the predetermined period may be).

Let's say you put aside Rs1,000 every month. If the price of the mutual fund is low this month, say about Rs 9, your Rs 10,00 allows you to buy about 111 units.

Next month, the price of the mutual funds may have risen to say Rs 10. Your Rs 1,000 would buy you 100 units. On the third month the price drops again to Rs 8, at which you acquire 125 units.

Altogether you would have spent Rs 3,000 and purchased 336 units in these 3 months. The average price of each unit would be Rs 3,000 divided by 336 units = Rs 8.92

If you had spent your entire corpus of Rs 3,000 in the first month, you would have paid Rs 9 per unit. So 'averaging' allowed you buy more units at a lower average price.

Make volatility work for you

When you average in this way, you are making the inherent volatility of markets work for you. It is impossible to buy low and sell high all the time. So the best solution is not to be caught committing all your money at the high point of a market cycle.

If you did, you may not be able to make any profit until the next cycle comes along. By averaging, the price of your units will tend towards the middle price of the market cycle that you are in. You will still get to enjoy a pretty good upside.

So instead of stressing out over the volatility of the market, you can rest assured knowing that your savings plan actually works for you in those volatile conditions! That's what mutual fund investing is meant to do. Give you more money and less stress!