SIP: AN EASY, PROFITABLE WAY TO WEALTH

Sashi Sekhar Saha
Founder & Partner, Niwesh Wealth

Systematic investment plan or SIP has been around for a long time, but in recent years it has become an intuitive way to invest in mutual funds. SIP is essentially a facility attached to open-ended mutual funds, debt or equity, which lets you break up your investment into smaller equal parts and invest each at a pre-fixed interval of your choice. SIPs can help you align your investment with your regular monthly earning. Also, by investing each month, you are able to capture market levels whether up or down. This is why the structure of a SIP works well, but in order to achieve your expected return, you also need to contribute. First, try matching your SIP with your goals, both long-term and short-term. Secondly, be patient through periods of negative return. Here is how you can make your SIP efficient and relevant to your wealth creation journey.

Match Your Goals

Investments are best served by goals and for each goal you can match your SIP. For short-term financial goals where you need funds in the next six months to two years you can use SIPs in debt funds and for long-term goals SIPs in equity funds make the most sense. By aligning your SIP with a specific goal you can check the progress of your investment towards achieving that goal and ensure you aren't eating into investments meant for other financial goals. Let's say you need Rs.50,000 in 12 months' time for a down payment on that new car you want to buy. Start a SIP of Rs.4,000 each month in an open-ended debt scheme like short-term income fund. At an assumed 8.5%  annual return, in 12 months you will have slightly more than Rs.50,000. Similarly, match a long-term goal like retirement which is say 15-20 years away with a SIP in an equity fund.

Average the Cost

Your equity mutual fund SIP for your long-term goals requires more time. In the near term, markets and stock prices move up and down on a daily basis. Remember, a SIP lets you invest every month. Let's say you begin with an Rs.5,000 SIP for your retirement 20 years away. The price or NAV of the equity fund is Rs.50 when you begin and you obtain 100 units of the fund for your first SIP. In the next month, if the market does well, the fund NAV increases to say Rs.51 and you get 98 units for the second month of the SIP. Keep in mind that the value of the first 100 units is now higher as well. If in the third month the market falls and the equity fund NAV falls to Rs.49, you will get 102 units for your Rs.5,000 monthly SIP. By the end of three months you have 300 units at an average cost of Rs.50. This simple example shows you how SIP helps you achieve a reasonable average cost of units by continuing your investment through market ups and downs.

Don't Panic

In the long run it's the earnings growth of the companies you invest in which matter rather than how the news and events affect prices today. That is why it is very important to balance the SIP scale by remaining invested when markets decline and the NAV is falling. That is the time you will get more units at a lower cost, which will then help average out your long-term cost.

Start Early

Let's say you expect a 12% annualised return from your equity mutual fund investments. If your target corpus is Rs.20 lakhs, do you know how much monthly SIP you need to start with? The answer to this question really depends on when you begin and how many years you can continue to invest. The longer you have, the lower is your required monthly SIP commitment. Say you want to achieve this corpus in five years. You will then need to make a monthly SIP of Rs.24,500 in a diversified equity fund with the assumption of 12% annualised return. However, if you increase your investment horizon to 10 years, you will need to invest just around Rs.8,800 each month in a SIP in a diversified equity fund with the assumptions above.

Investing in MFs is not just about picking good quality funds but also about taming behaviour to be regular and patient through the market noise. SIPs are a good way to achieve this behavioural alignment with your long-term goals. Don't shy away. Make it a habit you can't change. Start your regular SIP, sit patiently through rough periods, give your SIP time to mature, and see your wealth grow!

For more information contact : Sashi Sekhar Saha, Founder & Partner, Niwesh Wealth  Email: sashi@nivesh.co.in  Website: www.Nivesh.co.in