If you haven’t been reading the newspapers, the Indian mutual fund industry has been recording huge inflows since September 2017. In the month of December so far, the mutual fund industry had garnered close to Rs 5,900 crore. This is an increase of 52% over the previous year. All this was through the Systematic Investment Plan (SIP) route.
In the first eight months of the financial year 2017-18, fund houses have seen inflows of over Rs 40,700 crore. The mutual fund industry also seems to have added an average of more than 9 lakh SIP accounts every month in the financial year 2017-18. The average SIP amount invested was at Rs 3,200 per account.
With many of your friends already investing in SIPs, you may also like to jump on the bandwagon. Then, learn all about SIPs here.
What is a SIP?
In simple terms, a SIP refers to periodic investment in a mutual fund scheme. Most of the times, SIP is done on a monthly basis. However, one could also invest on a daily, weekly or quarterly basis. SIP is very similar to your bank recurring deposit (RD). You will be investing the same amount of money every month. Unlike an RD, there are no tenure restrictions for SIP. You can invest for however long you want. You can choose to invest in either debt mutual funds or equity mutual funds through SIP. Equity mutual funds invest in stocks while debt mutual funds invest in fixed-income investments like government bonds.
Benefits of a SIP
Ideally, when you are investing in equity mutual funds, you will want to invest when the markets are down. This is supposed to ensure that you get higher returns when the market goes up. However, even the best of experts can’t time the market right. How can lay investors like us do that? This is precisely the reason why you need a SIP.
A SIP can average out the cost of investing when you remain invested for the long term. To understand this better, let’s take an example. Let us suppose you have Rs 50,000 to invest. The markets are high and the NAV of the fund that you want to invest in is at Rs 12. The next month, the market falls and NAV to Rs 8. You decide to invest Rs 50,000 as a lump sum. You get 6,250 units. What if you had invested Rs 10,000 per month for five months? Look at the table below.
|Lumpsum Investment||SIP Investment|
|Month||NAV (Rs.)||Amount||Units purchased||Amount||Units purchased|
|Lumpsum Portfolio Value||37500||SIP Portfolio Value||46071|
|Average cost||8||Average Cost||7.4|
When you invest a lump sum, you get a lower number of units. In this case, you get 7,679 units when you invest in a SIP when compared to the 6,250 units when you choose to invest it as a lump sum. Another important point is that the average purchase cost of each unit is also lower. So, your portfolio tends to be of higher value. Here, we have taken a scenario where the market is volatile. SIP works best in a volatile market and not in a bullish market. In the long term, the equity markets are volatile and that is why most SIPs give the best returns if you stay invested for three or more years.
Once you start a SIP, link it to a goal such as buying a house, so that you are not tempted to dip into the money during emergencies. Also, don’t stop your SIPs during market downturns. Staying invested through these times will help you get good returns when the market begins to go up.