46327062 Systematic Investment Plan

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Systematic Investmen t Plan

Supreeth A Raman Supreeth Nag B S Sanjay K S Rajesh C Mohamed Zubair Puneeth Raj Bhanu Prakash

Systematic Investment Plan
Systematic Investment Plan is an approach to investing within managed investments which involves investing a set of amount at regular intervals rather than investing a larger lump sum amount in one shot. By investing this way you are not attempting to capture the highs and lows of the market but rather the cost of your investment is averaged over a period of time. The essence of SIPs is that when the markets fall investors automatically acquire more units. Likewise they acquire lesser units when the market rises. This means that you buy less when the price is high whereas you buy more the price is low. Hence the average cost per unit drops down over a period of time. Systematic Investment Plan (SIP) is a convenient way to accumulate wealth in a disciplined manner over a long-term period. It helps you to invest regularly in small installments and thereby build wealth over a period of time. SIP is a method of investing in a mutual funds scheme. Mutual fund schemes are offered by the Asset Management companies (AMC) to customers through a distributor. The Bank acts as a distributor of Mutual Fund products for the AMC to the customers. A customer wanting to invest in a mutual fund scheme can avail of the Systematic Investment Plan. The Systematic Investment Plan (SIP) is a simple and time honored investment strategy for accumulation of wealth in a disciplined manner over long term period. The plan aims at a better future for its investors as an SIP investor gets good rate of returns compared to a one time investor. A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help you save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund. The minimum amount to be invested can be as small as Rs 100 and the frequency of investment is usually monthly or quarterly.

What is Systematic Investment Plan
• • • •



A specific amount should be invested for a continuous period at regular intervals under this plan. SIP is similar to a regular saving scheme like a recurring deposit. It is a method of investing a fixed sum regularly in a mutual fund. SIP allows the investor to buy units on a given date every month. The investor decides the amount and also the mutual fund scheme. While the investor's investment remains the same, more number of units can be bought in a declining market and less number of units in a rising market. The investor automatically participates in the market swings once the option for SIP is made.

SIP ensures averaging of rupee cost as consistent investment ensures that average cost per unit fits in the lower range of average market price. An investor can either give post dated cheques or ECS instruction and the investment will be made regularly in the mutual fund desired for the required amount. SIP generally starts at minimum amounts of Rs.1000/per month and upper limit for using an ECS is Rs.25000/- per instruction. For instance, if one wishes to invest Rs.1, 00,000/- per month, then they need to do it on four different dates.

How to invest in SIP?
Step 1: Select a mutual fund scheme of your choice with the payment option as SIP Step 2: Decide the Investment periodicity (frequency of making payments). You can choose to make your investment on a monthly or quarterly basis. Step 3: Select the minimum investment amount. For instance, if you choose to invest Rs 12,000 every year with a monthly SIP Option. Therefore you would be investing Rs 1,000 every month in your fund. By the end of a year, you would have invested Rs 12,000 in your fund. Step 4: The amount gets converted into units, depending on the Net Asset Value (NAV). NAV is the market value per unit of a fund. If the NAV in the first month is Rs 20, you will get 50 units. Similarly in the next month if the NAV is Rs 25, you will get 40 units. The following month if the NAV is Rs 18, then you will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. Step 5: The units get accumulated over a period of time. You can stay invested till the time you wish and redeem your units when you wish to exit from the scheme. The units are redeemed at the market value (NAV) and you get back your money with returns.

Why invest in SIP’s right now?
• • • • • The current scenario in equity market is dominated by negative sentiment, which has led to fundamentals being ignored. This scenario has created volatility in the markets and uncertainty of future outlook. The prudent way to invest in this scenario is to benefit from the volatility and this can be done by investing through SIP’s A monthly SIP helps in averaging out the cost of purchase and benefit from power of compounding. It also helps in creating wealth over a longer time period.

Advantages of SIP
Power of Compounding - The longer the period of your investment, the more wealth you accumulate because of the power of compounding. That’s why it makes sense to start investing early. Simply put, the incremental returns that you earned on your principal plus the accrued gains is compounding. Rupee Cost Averaging - Most investors want to buy stocks when the prices are low and sell them when the prices are high. But timing the market is time consuming and risky. A more successful investment strategy is to adopt this method called Rupee Cost Averaging. By investing in an SIP you end up buying more units when the price is low and fewer when the price is high. Convenience and Regularity - SIP gives you the convenience to pay through Axis Bank Electronic clearance service (ECS) or Auto Debit. You can decide the amount and the mutual fund scheme. A fixed amount will automatically get debited from your account on a date specified by you. Disciplined approach towards investment - Since you invest regularly, it makes you disciplined in your savings, which leads to wealth accumulation. Disciplined investing is vital to earning good returns over a longer time frame.

Disadvantages of SIP
Tax planning: Yes, setting up a SIP in a tax planning mutual fund will help you reduce taxes, but if you invest the same amount at one go in the same mutual fund – you will get the same tax benefit. Tax benefit is not something exclusive to a SIP. SIP lead to building wealth: Good saving and investing habits are more likely to help you accumulate wealth in the long run, but there is no guarantee that you will end up doing so. Especially, if you invest in equity mutual funds. Ignore the spreadsheets: I came across more than a couple of websites that had examples of how a person could accumulate more units because of regular investing when compared with someone who buys in bulk. These calculations are just based on the assumptions the respective authors make, and there is no guarantee that you will accumulate more

units if you bought units regularly. A lot depends on market gyrations and nothing can be said with certainty.

How an SIP works
An SIP allows you to take part in the stock market without trying to second-guess its movements. An SIP means you commit yourself to investing a fixed amount every month. Let's say it is Rs 1,000. When the Market price of shares fall, the investor benefits by purchasing more units; and is protected by purchasing less when the price rises. Thus the average cost of units is always closer to the lower end. { NAV : Net Asset Value , or the price of one unit of a fund. Can be computed as follows : NAV = [ market value of all the investments in the fund + current assets + deposits - liabilities ] divided by the number of units outstanding.} Date NAV Approx number of units you will get at Rs. 1000 Jan 1 10 100 Feb 1 10.5 95.23 Mar 1 11 90.90 Apr 1 9.5 105.26 May 1 9 111.11 Jun 1 11.5 86.95 Within six months, you would have 5,89.45 units by investing just Rs 1,000 every month. Over the long run, you make money Let's say you invested in Prudential ICICI Technology Fund during the dotcom and tech boom. Say you began with Rs 1,000 and kept investing Rs 1,000 every month. This would be the result: Investment period


Mar 2000 to Mar 2005

Monthly investment


Rs 1,000

Total amount invested


Rs 61,000

Value of investment of Mar 7, 2005


Rs 1,09,315

Return on investment


23.87%

Had you bought the units on March 13, 2000 at Rs 10.88 per unit (that was the NAV then), you would have lost because the NAV was just 7.04 on March 7, 2005. But because you spaced out your investment, you won.

How an SIP scores
It makes you disciplined in your savings. Every month you are forced to keep aside a fixed amount. This could either be debited directly from your account or you could give the mutual fund post-dated cheques. As you see above, it helps you make money over the long term. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time. So you tide over all the ups and downs of the market without any drastic losses. Also, a number of mutual funds do not charge an entry load if you opt for an SIP. This fee is a percentage of the amount you are investing. And if you do not exit (sell your units) within a year of buying the units, you do not have to pay an exit load (same as an entry load, except this is charged when you sell your units). If, however, you do sell your units within a year, you would be charged an exit load. So it pays to stay invested for the long-run. The best way to enter a mutual fund is via an SIP. But to get the benefit of an SIP, think of at least a three-year time frame when you won't touch your money. Of course you would lose money if your units lost value over time. What most SIP Mutual funds don't tell you is that they recover their fees as monthly charges by selling your units, so while you are buying more units when the market is down, more of your units are also being sold to fund the monthly charges of the Mutual fund. Also the Bid and Offer of the Mutual Fund is around 7% and this is the front load or expense you pay for buying the units each month. Also sometimes the Mutual fund will have annual fee charges.

In spite of the above drawbacks the retail investors' benefit in the long term horizon of 5-8 years is enormous. Only make sure that you can switch your funds from stock market to money market at short notice when the markets are really in a correction phase to safeguard the profits which you have made when the market was in a booming phase.

Example:
Consider the following example of two rational people who each invest the same amount of money into a managed fund over a period of time. Investor A decides to invest Rs. 10000 now. Investor B decides to invest by way of an SIP - Rs. 1000 each month. Investor A Units Investor B Units Month Unit Price (In Rs.) Purchased (In Rs.) Purchased 1 2 3 4 5 6 7 8 9 10 10000 0 0 0 0 0 0 0 0 0 1000 0 0 0 0 0 0 0 0 0 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 Rs. 10000 Rs. 11988 100.0 105.3 114.3 115.6 118.3 125.0 117.6 107.5 95.2 90.9 1089.8 10.0 9.5 8.8 8.7 8.5 8.0 8.5 9.3 10.5 11.0

Total Rs.10000 Investment Total Value Rs.11000

The table shows that Investor B is in a better position by investing through

a Systematic Investment. It shows that at the end of the investment period of 10 months Investor A who made an Lump sump investment has 1000 units in his portfolio has a market value of Rs. 11000. Whereas, Investor B who made investments through an SIP has 1090 units in his portfolio which has a market value of Rs. 11988.

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