Top 5 Advantages Of SIP_OLD

Sumit Kati

22 Jul 2017

As per the famous saying the basic need of an individual is Roti (Food), Kapda (Clothing) aur Makaan (Shelter) but we can extend it further to SIP (Systematic Investment Planning).

Before discussing SIP, let us first understand/revisit what is mutual fund, in brief?

Mutual fund is a vehicle to mobilize money from the investors to invest in different markets and securities, in line with the investment objectives agreed upon, between the mutual fund and the investors. In other words, through investment in a mutual fund, a small investor can avail professional fund management services offered by an asset management company.

Mutual fund is a pool of money managed by experts by investing in stocks, bonds and other securities with the objective of improving their savings. These experts will create a diversified portfolio from these funds.

SIP and advantages of SIP
Systematic Investment Plan in Mutual Fund is commonly named as SIP and it is getting very popular in India. Systematic Investment Plan is such a beautiful tool, which; if used properly can help you achieve all your financial goals.

We all have various financial obligations. Some of them are like daily needs, school fees, etc that involve the major outgo of your cash. Others like a trip with your family or buying a fancy gizmo entails a one time payment for which money can be relatively easily collected. But for long term goals like retirement or purchasing a home requires you to save and invest for many years. Yet irrespective of the amount involved and the time horizon, planning and investing money systematically and regularly enables you to sail through these obligations. A SIP could prove to be a simple and effective solution towards achieving these goals.

A SIP is a method of investing in mutual funds, by investing a fixed sum at a regular frequency, to buy units of a mutual fund schemes. It is quite similar to a recurring deposit of a bank or post office. For the convenience, an investor could start a SIP with a low rate of Rs 500; however this amount may differ from one fund house to another.

What is your equation to investments:
1) EARN-SPEND=SAVE
2) OR EARN-SAVE=SPEND

The first one is a wrong way of investing. You should be saving in a disciplined manner and SIP enables you to follow the second, which is the correct equation of investments.

Advantages of SIP
1) 
Light on the wallet: It is easier to build a long term innings with singles than hitting 4s and 6s everytime. It is convinient to save Rs.500 or Rs.1000 every month than trying to save a lac in one shot. SIP does not hurt and it gives long term benefit as well.

2) Makes market timing irrelevant: If market lows give you the jitters and make you wish that you had never invested in equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? Its because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record.  

3) Helps you build for the future: Most of us have needs that involve significant amount of money, like child’s education, daughter’s marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But if you start saving a small amount every month/quarter through SIPs that is treated as sacred and that is set aside for some purpose, you have a far better chance of making the down payment on your house or getting your daughter married without drawing on your PF (provident fund).

4) Compounds returns: The early bird gets the worm is not just a part of the jungle folklore. Even the ‘early’ investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. This is mainly due to a thumb rule of finance called ‘compounding’. According to a study by Principal Mutual Fund if Investor Early and Investor Late begin investing Rs 1,000 monthly in a balanced fund (50:50 – equity:debt) at 25 years and 30 years of age respectively, Investor Early will build a corpus of Rs 8 m (Rs 80 lakhs) at 60 years, which is twice the corpus of Rs 4 m that Investor Late will accumulate. A gap of 5 years results in a doubling of the investment corpus! That is why SIPs should become an investment habit. SIPs run over a period of time (decided by you) and help you avail of compounding.

5) Lowers the average cost: SIPs work better as opposed to one-time investment. This is because of rupee-cost averaging. Under rupee-cost averaging an investor typically buys more of a mutual fund unit when prices are low. On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors may even be pleased when prices fall because the fixed rupee investment would now fetch more units.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Top 5 Advantages Of SIP_OLD

Sumit Kati

22 Jul 2017

As per the famous saying the basic need of an individual is Roti (Food), Kapda (Clothing) aur Makaan (Shelter) but we can extend it further to SIP (Systematic Investment Planning).

Before discussing SIP, let us first understand/revisit what is mutual fund, in brief?

Mutual fund is a vehicle to mobilize money from the investors to invest in different markets and securities, in line with the investment objectives agreed upon, between the mutual fund and the investors. In other words, through investment in a mutual fund, a small investor can avail professional fund management services offered by an asset management company.

Mutual fund is a pool of money managed by experts by investing in stocks, bonds and other securities with the objective of improving their savings. These experts will create a diversified portfolio from these funds.

SIP and advantages of SIP
Systematic Investment Plan in Mutual Fund is commonly named as SIP and it is getting very popular in India. Systematic Investment Plan is such a beautiful tool, which; if used properly can help you achieve all your financial goals.

We all have various financial obligations. Some of them are like daily needs, school fees, etc that involve the major outgo of your cash. Others like a trip with your family or buying a fancy gizmo entails a one time payment for which money can be relatively easily collected. But for long term goals like retirement or purchasing a home requires you to save and invest for many years. Yet irrespective of the amount involved and the time horizon, planning and investing money systematically and regularly enables you to sail through these obligations. A SIP could prove to be a simple and effective solution towards achieving these goals.

A SIP is a method of investing in mutual funds, by investing a fixed sum at a regular frequency, to buy units of a mutual fund schemes. It is quite similar to a recurring deposit of a bank or post office. For the convenience, an investor could start a SIP with a low rate of Rs 500; however this amount may differ from one fund house to another.

What is your equation to investments:
1) EARN-SPEND=SAVE
2) OR EARN-SAVE=SPEND

The first one is a wrong way of investing. You should be saving in a disciplined manner and SIP enables you to follow the second, which is the correct equation of investments.

Advantages of SIP
1) 
Light on the wallet: It is easier to build a long term innings with singles than hitting 4s and 6s everytime. It is convinient to save Rs.500 or Rs.1000 every month than trying to save a lac in one shot. SIP does not hurt and it gives long term benefit as well.

2) Makes market timing irrelevant: If market lows give you the jitters and make you wish that you had never invested in equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? Its because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record.  

3) Helps you build for the future: Most of us have needs that involve significant amount of money, like child’s education, daughter’s marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But if you start saving a small amount every month/quarter through SIPs that is treated as sacred and that is set aside for some purpose, you have a far better chance of making the down payment on your house or getting your daughter married without drawing on your PF (provident fund).

4) Compounds returns: The early bird gets the worm is not just a part of the jungle folklore. Even the ‘early’ investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. This is mainly due to a thumb rule of finance called ‘compounding’. According to a study by Principal Mutual Fund if Investor Early and Investor Late begin investing Rs 1,000 monthly in a balanced fund (50:50 – equity:debt) at 25 years and 30 years of age respectively, Investor Early will build a corpus of Rs 8 m (Rs 80 lakhs) at 60 years, which is twice the corpus of Rs 4 m that Investor Late will accumulate. A gap of 5 years results in a doubling of the investment corpus! That is why SIPs should become an investment habit. SIPs run over a period of time (decided by you) and help you avail of compounding.

5) Lowers the average cost: SIPs work better as opposed to one-time investment. This is because of rupee-cost averaging. Under rupee-cost averaging an investor typically buys more of a mutual fund unit when prices are low. On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors may even be pleased when prices fall because the fixed rupee investment would now fetch more units.

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