Wealth creation is neither difficult nor impossible for disciplined and wise investors. A mutual fund (MF) systematic investment plan (SIP), which is not any MF scheme name. It can help investors with wealth creation with convenience and ease. It is a simple, and time-tested strategy for investors to accumulate wealth in a disciplined way for the longer-term. SIP is investing systematically a specific amount, a SIP Amount, in a mutual fund scheme at a regular interval, continuously for a certain long period. Say, an investor can choose a SIP of Rs. 10,000/month for 5-10 years in a particular mutual fund scheme based on his convenience.
Advantages of SIP:
Auto timing of market participation:
A most important benefit of SIP is to automatically time to enter the market. A person will be investing a fixed amount on a fixed date every month, irrespective of market-high or low.
Rupee cost averaging:
When the market is high, he will buy a lower number of units vice versa. Over some time, the average cost of the unit will be lower. That is commonly known as "Rupee Cost Averaging."
Illustration - Rupee Cost Averaging:
Say a person has opted for a SIP of a diversified equity MF Scheme, investing Rs. 10000 every month from March 2020 to Feb 2021. the average purchase cost per unit of SIP would be lower than the average NAV of investment over 12 months.
| S No | Date | Amount (Rs.) | NAV (Rs.) | Units (nos.) |
|---|---|---|---|---|
| 1 | 10/3/2020 | 10,000 | 100 | 100 |
| 2 | 10/4/2020 | 10,000 | 115 | 87 |
| 3 | 10/5/2020 | 10,000 | 125 | 80 |
| 4 | 10/6/2020 | 10,000 | 130 | 76.9 |
| 5 | 10/7/2020 | 10,000 | 132 | 75.8 |
| 6 | 10/8/2020 | 10,000 | 145 | 69 |
| 7 | 10/9/2020 | 10,000 | 150 | 66.7 |
| 8 | 10/10/2020 | 10,000 | 139 | 71.9 |
| 9 | 10/11/2020 | 10,000 | 165 | 60.6 |
| 10 | 10/12/2020 | 10,000 | 172 | 58.1 |
| 11 | 10/1/2021 | 10,000 | 182 | 54.9 |
| 12 | 10/2/2021 | 10,000 | 175 | 57.9 |
| 1,20,000 | 1730 | 858 |
Note: A hypothetical NAV is used to explain the concept of Rupee Cost Averaging and it does not indicate any past or future NAV of any mutual fund scheme.
Average Cost = Total Cash Outflows / Total Number of units = Rs. 120000/ 858.00 = Rs.139.85
Average Price = Sum of all NAVs invested/ Total months of investment = Rs. 17300/12 = Rs.144.17
Average Cost of Units < Average Price
Discipline in saving habit:
Discipline in investing helps to create wealth over a more extended period. People plan to invest a lump sum, but they delay or do not invest for several reasons. Disciplined monthly SIP ensures that the investors are saving money at regular intervals. A small amount, invested regularly, can help create massive wealth for a more extended period.
Compounding power:
Most of us know the brilliant scientist Albert Einstein, the man behind the Atom bomb who gave the equation E-mc2 but not aware that the same person has mentioned that compound interest (CI) is the eighth wonder of the world. The person who understands the CI will earn it, and if he doesn't understand, he will pay the same.
The longer the SIP duration, the better the power of compounding to create significant wealth. SIPs have delivered excellent returns historically. The average return and the benefit of compounding power of a diversified equity MF SIP is illustrated in the below table:
| SIP Amount: of Rs.10,000*(Started 20th February) | 1 year | 2 years | 3 years | 5 years | 10 years |
|---|---|---|---|---|---|
| Average Returns of Diversified Equity MF Scheme (%) | 83.8 | 38.78 | 27.41 | 21 | 23.26 |
| Actual Amount Invested (Rs) | 1,20,000 | 2,40,000 | 3,60,000 | 6,00,000 | 12,00,000 |
| Average Current Wealth / Investment Value of MF SIP (Rs) | 1,69,819.1 | 3,44,194.1 | 5,35,106.7 | 10,12,302.9 | 41,14,262.7 |
Disclaimer: Value is as on 23rd Feb 2021 with internal source. Past performance is not an indication of future performance. Returns are subjected to market fluctuations and are not guaranteed.
Also, please read our article compound interest.
For achieving Financial Goals:
Due to disciplined savings and good return potential during the long term, SIP can be used effectively to plan life’s financial goals. If a SIP is started for a kid’s education or marriage or own retirement, the financial goals can become real by matching the SIP period with the years remaining for the goal. The same is explained with the help of the below example:
| SIP Period in years > | 5 | 10 | 15 | 20 | 25 | 30 |
|---|---|---|---|---|---|---|
| Yearly Return | End Value for a monthly SIP of Rs. 1,000/- | |||||
| 10% | 77,429 | 2,04,798 | 4,14,318 | 7,58,975 | 13,25,930 | 22,58,560 |
| 12% | 81,670 | 2,30,039 | 4,99,580 | 9,89,255 | 18,78,847 | 34,94,964 |
| 15% | 88,575 | 2,75,217 | 6,68,507 | 14,97,239 | 32,43,530 | 69,23,280 |
| 20% | 1,01,873 | 3,77,060 | 11,20,418 | 31,28,434 | 85,52,647 | 2,32,04,957 |
| Total Investment (Rs) | 60,000 | 1,20,000 | 1,80,000 | 2,40,000 | 3,00,000 | 3,60,000 |
Note: The table is for illustration purposes only. Past performance may not repeat in the future. Returns are subjected to market fluctuations and are not guaranteed.
Convenience to invest:
One can start SIP with postdated cheques or ECS for a specified date, and the units will be credited into the investor's account. SIP can be started with as low as Rs.500/month, depending on the scheme. Due to the convenience of SIP, it becomes an ideal investment for small and retail investors.
The markets are unpredictable, and returns are not guaranteed for a shorter period. By investing for a longer time, market risk will be reduced and it will help to create significant wealth.
By Team Wealth ATM
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Mutual fund investments are subject to market risk. Read the scheme-related documents carefully.