SIP (Systematic Investment Plan)

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When it comes to equity related investments, most people wonder about the effectiveness of SIP. There is a lot of apprehension (and misconception) prevalent on the street about SIP - that it would not give as good a return as a lump-sum invested during a down turn. Let us consider some scenarios from our real-life situation to understand the effectiveness of SIP. We take our tablets / health capsules daily, exercise daily, receive a pay packet monthly, pay our bills/taxes monthly and even diligently pay our insurance premium yearly. This is sufficient proof that a systematic and continuous plan works for most of our financial and non-financial matters of our lives.

Scenario Analysis
Now coming to SIPs, let us consider 3 investors, all investing the same amount of Rs.8.4 Lacs over an investment horizon of 7 years and compare their outcomes:
  • A invests Rs.10000 in a monthly SIP and accumulates Rs.17.05 Lacs, with annualized returns of 19.88%
  • B invests a lumpsum of Rs.1.2Lacs p.a using his discretion to time the market each year and realizes Rs.15 Lacs, with annualized returns of 16.26%
  • C invests a lumpsum only when the market corrects significantly (say when 15%-20% down) - this is due to his timing the market strategy and he gets a return of Rs.12 Lacs with annualized returns of 9%
The above data is based on equity market returns during 2006-2013 in large cap equity mutual funds. It is apparent that investor A gained the most while being in an auto-gear (monthly SIP). He did not pull out his SIP during the corrections in 2008, 2009 & 2012. Investor B did fairly alright as well but his lower 16.26% return is due to his yearly SIP which was not in auto-gear. However investor C faired poorly in comparison to investors A & B due to his strategy of timing the market all by himself. In many cases, investors have timed the market and have lost upto 30% of their portfolio!

Planner's recommendation
Recent budget offers Rs.1.5 Lacs exemption under section 80c for investing in ELSS (Equity Linked Savings Scheme). Consult your financial planner and choose 2-4 schemes to invest via ELSS to realize an additional tax savings of Rs.46350 p.a. You may choose to spend this savings on your vacation or gift it to your dear ones. Once you've performed a careful fund selection with your planner, SIP auto-gear is the way to go to build long term tax-free wealth!

Comments

  1. earnest Q28 June 2019 at 06:36

    Systematic investment plan has many advantages even college students could invest money and get more returns.
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    ReplyDelete
  2. mrkdvsn31 December 2019 at 22:20

    I am glad that I saw this post. It is informative blog for us and we need this type of blog thanks for share this blog, Keep posting such instructional blogs and I am looking forward for your future posts.cursus boekhouden zzp

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