Tuesday, April 14, 2009


Mr. Rakesh Kumar is a senior executive with a private firm drawing salary of Rs 25000 per month. He has been working since last 3 years ,but ,hasn't been able to invest much in last 3 years . He says he never had enough money saved which he could invest. There are quite a lot like Rakesh Kumar out there. Almost all of us have felt that our savings are inconsequential and hence investing such a small amount wont make much of a difference. The result is we never invest only. So what is the solution? How can someone with modest income and saving start investing ? The answer to this is Systematic Investment Plan or SIP.
What is SIP? SIP is a method of investing a fixed sum of money every month in a scheme. It is similar to a recurring deposit where a fixed amount is deposited every month in the bank account. Under SIP, fixed money is invested by the investor which in turn is used by the AMC ( Asset Management Company ) to buy units form the same money for the investor.
How does it work? You can start investing through SIP in mutual fund either by giving post dated cheques (PDCs) of the SIP amount to the bank/AMC etc or you may choose to go in with ECS or standing instructions. The minimum amount that is generally allowed for SIP is Rs 500 and the maximum amount under ECS is Rs 25000. This is not to say that you can not invest more than 25000 under ECS . For that you may have to go for multiple ECS mandates.Now the money which is invested by you under SIP will be used by the AMC to buy shares/bonds etc on your behalf from the market at the prevailing rates.SIP option is available to an investor for all the 3 fund types viz equity,debt,balanced.
How does it benefit ? Investing via SIP makes lot of sense for everyone. There are lot of benefits of SIP investing.Some important ones are: -
Benefit of Rupee Cost Averaging - Rupee Cost Averaging means that due to SIP, your overall cost of buying shares/units etc is lesser over a period of time due to variation in the market price of the shares. It happens because , under SIP, one gets to buy more shares/units when the price is lesser . And when the prices is higher, then the units/shares bought are lesser. For example, if you are investing RS 1000 every month in a mutual fund scheme whose NAV lets say is Rs 100. First month with Rs 1000 , you will get 10 units (1000/100). Now if the NAV of the same fund were to fall next month to lets say RS 67, then the units that you will get will be 15(1000/67). So the average price of purchase of units for 2 months would be Rs 80 only. This is how rupee cost averaging helps investor.
- Inculcates habit of savings - The biggest advantage of SIP is that it inculcates a habit of saving. Since under SIP you are required to make payments every month, you become more disciplined in your approach towards saving. It makes saving a habit over a period of time and this is its biggest advantage.- Regular investment ensures no stress on one's finances - Under SIP, one can choose to pay whatever amount he is comfortable with every month without stretching one's finances. The amount can be as low as RS 500. Even RS 500 paid over 12 months will mean you would have invested RS 6000 in a year without stretching yourself at all.
- Gets you the option to buy best companies which you may not have been able to buy otherwise - Lets say you want to buy Reliance Industries shares and the market price of Reliance is Rs 2500. So to buy even 1 Reliance share, you will have to shell out Rs 2500. Now if your budget is only Rs 1000, you cant buy it. But under SIP, you can do so by investing in a mutual fund which invests in Reliance Shares. Here you will get proportional holding in Reliance shares through the unit that's allocated to you on your investment. Thus helps you buy best of the companies as well.
- Makes Market timing irrelevant - If you are investing regularly via SIP, then the issue of market timing becomes irrelevant. Experts have always maintained that its the "time" in the market which is crucial and not the "timing". With SIP investing you are buying always irrespective of the market scenario helping you make wealth over a period of time without bothering to get the timing of the market right. Moreover, no one can time the market consistently. So its better not to try doing that.
Who is it meant for ? Its meant for you , me and our uncle.In other words, its meant for everyone. One misconception is that its meant for poor people only. This is not true. SIP has its unique benefits which works for affluent investors as well. I would also say that it makes more Check Spellingsense for salaried people to go in for SIP because of the nature of cash flow that they get. They get money monthly in the form of salary and hence for them its easier to remove a part of it towards SIP every month.
Any Disadvantage?No major disadvantage. The only minor disadvantage is that for people who can get the market timing right and invest at one go at the bottom of the market might be able to beat the returns from a SIP fund. But, market timing is an art perfected by none.So stick to SIP.
Stay wise n Stay wealthy...

No comments:

Post a Comment