Equity Market is ACTIVE or in REST – SIP is always the Best !
Updated: Jul 2, 2021
This three letter word - SIP has created wonders for millions of investors across India.Mutual Fund SIP accounts stood at 3.73 CRORE people ! And the total amount collected through SIP during March 2021 was ₹9,182 crore per month..whopping ! Isn't it ?
So first of all, let me clarify you – SIP is not the name of any scheme or product; it is a recurring method of investment or you can say it is just a synonym of ‘Recurring Investments’. So , to start a SIP, you need to first choose the Asset or Scheme or Product. Like- you can start SIP in Gold, Stocks, Silver, Bank FDs…….or Mutual Fund Schemes
SIP is the short form of ‘Systematic Investment Plan’; and in Hindi it is called as ‘ नियमित निवेश योजना’
The key word to note, is ‘Systematic’ – ‘Regular’ – ‘Discipline’ ! This word works as a wonder in all aspects of our life – like , Systematic exercise increases your strength, Systematic work increases your career success …and more
This word ‘Systematic’ plays very vital role in wealth creation too ! Today we will talk about this highly beneficial and popular investment method – SIP ( Systematic Investment Plan) . We will try to understand the core strength of SIP and learn about some Do’s and Don’ts to create big wealth though SIPs
And here comes the Key Question : “ Which Asset or Scheme or Product is the best for starting a SIP ?’
In order to answer this Question, we need to understand the basic working principle of a SIP. A SIP works on following four principles :
1. Regular Investing
2. Averaging of Purchase Cost
3. Accumulation of more and more units or shares of the scheme
4. Power of Compounding is applied on the accumulated units
For Point 1 , you can choose any Asset
For Point 2, you need the product which has some element of volatility; because non-volatile assets will not provide you any cost averaging. It sounds strange but is real – SIP works well with Equity funds, which are volatile and risky
For Point 3 , you again need to go with Equity assets; because you need the mark to market falls or discounts to accumulate higher units
For Point 4, you surely need to go with equity funds; because all your accumulated units will provide higher compounding benefits if there is any upsurge in the market price of those units
So summing up, you need a good Equity Asset to start a SIP. And we all know, an Equity Mutual Fund Scheme is much better than a single Equity Asset, for multiple reasons like- diversification, transparency, professional management etc.
So let us take a dummy example of SIP in two different type of schemes or products – one is high volatile and another is almost zero volatile. As you can see in the table below - although both the schemes NAV started at 11 and ended at 12 , however the Scheme 1 accumulated higher units due to volatility !
As you see, the scheme with higher element of volatility has accumulated higher number of units, and hence got higher advantage of compounding at later stage. Despite having same Strat NAV and same End NAV, scheme 1 is valued at Rs 16,000/- as compared to Rs 13,000/- in Scheme 2. I am sure you will start loving volatility from now !!!
In order to get the best out of your SIP, here are some Do’s and Don’t for every SIP investor :
Always choose a well-diversified Equity MFs schemes for long term SIPs ( greater than 5 Yrs) and Stable Hybrid Funds for Short term SIPs ( less than 5 Yrs)
Always spread your SIP debit dates across the month like- 1st SIP on 5th , 2nd SIP on 10th, 3rd SIP on 15th etc . This will give you better opportunity to grab volatility and cost benefit
Must mark your Financial Goals with every SIP for better discipline in your savings – like, SIP for home renovation, SIP for Vacation, SIP for Marriage Anniversary, SIP for Medical Kitty, SIP for retirement etc
Don’t choose sectoral funds or thematic funds , if you don’t know when to exit
Don’t stop or pause your SIP in falling market , because that is the best time to accumulate higher units
Never look at the current returns of your SIP , rather focus on the unit accumulation in your SIP. So please remember – higher the fall in NAV or price, higher will be your unit accumulation
So by now you have understood the basic concept of SIP. Now let me provide you some estimate on the future values of your SIP at different stage of your life. Here, I have taken an example of Rs 10000