Systematic Investment Plan - SIP

What is SIP?

Most of us know SIP – Systematic Investment Plan.

In simple words, it is an Investment in EMI form. Only difference between SIP and Loan EMI is that in a loan, you borrow a Lump sum amount and repay it in EMI (Equated Monthly Instalments). In a SIP, you pay EMIs and accumulate a Lump sum, which can be used towards meeting a Financial Goal or Objective.

What is the advantage of SIP?

In simple terms, rupee cost averaging. Let’s look at an Example:

I buy Onions worth Rs 100 every month-my amount spent on onions is fixed. However, the rate of Onions could vary. Let us say it is Rs.10, 15, 20, 25 and 10 for 5 months.

	Amount	Rate of Onions	Qty of Onions
	100	10	10
	100	15	6.666666667
	100	20	5
	100	25	4
	100	10	10
Total	500		35.66666667
Average Price = 500/35.66667=Rs 14
Mathematical Average of Onion Price=(10+15+20+25+10)/5=16

So, though the average price of Onions over the 5 months period was Rs.16/kg, my average purchase price was Rs 14.

When does a SIP work Best?

A SIP works best when the market fluctuates in the short term and rises upwards in the long-term (2014-2017)

When Market rises upwards

SIP AMOUNT NAV UNITS 1 10000 10.00 1000.00 2 10000 11.00 909.09 3 10000 11.00 909.09 4 10000 12.00 833.33 5 10000 11.75 851.06 6 10000 12.25 816.33 7 10000 13.00 769.23 8 10000 14.00 714.29 9 10000 15.00 666.67 10 10000 14.75 677.97 11 10000 15.00 666.67 12 10000 16.00 625.00  TOTAL 120000 9438.72

Total invested amount in 12 months is Rs. 1,20,000.00 and Market value is Rs. 1,51,020.00

When does a SIP fail?

A SIP fails when the market fluctuates in the short term and falls in the long term (2010-13)

When Market falls

	SIP AMOUNT	NAV	UNITS
1	10000	16.00	625.00
2	10000	15.00	666.67
3	10000	14.75	677.97
4	10000	15.00	666.67
5	10000	14.00	714.29
6	10000	13.00	769.23
7	10000	12.25	816.33
8	10000	11.75	851.06
9	10000	12.00	833.33
10	10000	11.00	909.09
11	10000	11.00	909.09
12	10000	10.00	1000.00
	120000		9438.72

Total invested amount in 12 months is Rs. 1,20,000.00 and Market value is Rs. 94,387.00

SIP is best when one has a Long Term Goal like a child’s education/marriage or retirement planning and has a regular source of steady income.

These days you get Flexible SIPs where you can choose your SIP date, vary your SIP amounts and so on. Also, you can opt for a Step-up where your SIP amount increases every year. Say, you start with a SIP amount of Rs 2000 with a step-up of Rs 500 every year. The 1^st year, your SIP amount will be 2000, next year 2500, year after 3000 and so on.

Prasad wagle 

Financial Advisor

FINANCE FAIR 2017

Investor should be King 

On Saturday 11^th March & Sunday 12^th March 2017

Best funds for short-term goals - These funds score over bank FDs.

Though returns are market-linked, short-term debt funds are fairly stable and best suited for goals that are 1-3 years away. They are also more tax efficient than FDs.

Though bank deposits are the preferred in strument to save for short-term goals, debt mutual funds can be a better alternative. They are more tax efficient if held for more than three years and can even generate higher returns for investors. You could be saving to buy a car, go on a foreign holiday or even putting away money for your child's college admission. Meet Bengalurubased Waman Prabhu (see picture), who is saving to buy a car in about 2-3 years. A short-term debt fund will give him greater flexibility and better tax efficiency than bank deposits.

While Prabhu plans to start SIPs in a short-term debt fund, investors can even put a lump sum amount in these funds. Jenny D'Souza has saved about `7 lakh for her daughter's foreign education. She might need the money in 16-18 months, maybe even longer.A short-term debt fund will give her the required flexibility without tying her down to a fixed tenure.

Are debt funds safe?

It is a fallacy that debt funds cannot lose money. Their returns are linked to interest rate movements.When rates fall, the value of the bonds held by the mutual funds goes up, and vice versa. Interest rate cuts in the past six months have led to a rally in long-term bonds. But short-term debt funds hold bonds with a maturity of 1-2 years and are therefore not very sensitive to interest rate movements. Their earnings are primarily from the accrual of interest on the bonds they hold. Experts believe these funds will do well in the coming months. “Even though we may see one or two more rate cuts, we expect short-term bonds to outperform in the coming months,“ R.Sivakumar, Head of Fixed Income at Axis Mutual Fund.

In fact, smart money has been flowing into this category for some years now. “The AUM of short-term debt funds has shot up in the past one year. High net worth investors are using short-term debt funds as a tax efficient replacement of fixed deposit,“ reveals Kalpen Parekh, CEO, IDFC Mutual Fund.

Income funds, on the other hand, have a slightly longer maturity profile of 4-5 years. These funds will do well if interest rates are cut further, though experts are divided on whether the RBI will cut rates. If rates are not cut, income funds will give tepid returns. Even so, they are likely to give better post-tax returns in the 30% tax bracket. However, they may suffer some hiccups in the near term because bond yields are close to 7% now. Historically, long-term debt funds have not done too well when bond yields are so low. Go for them only if you intend to remain invested for at least 4-5 years.

When investing in a debt fund, do note that there is a small exit load (0.25-0.5%) payable if you withdraw before a minimum period. This minimum period is usually 6-12 months but can extend to 1218 months in some cases. SIP investors should note that each monthly instalment is treated as a separate investment. Let's assume that a fund charges exit load if investments are withdrawn before 6 months. If one starts a 12-month SIP in September 2016 and withdraws the entire amount in September 2017, only the first six SIPs will escape the exit load.

Sujit Waingankar

Member 

P V Bhagwat Investment Guidance Cell