Systematic Investment Plan A better way to build wealth over the long term

Systematic Investment Plan is a feature specifically designed for those who are interested in building wealth over a long-term and plan out a better future for themselves and their family. Anyone can enroll for this facility by starting an account with (minimum investment amount) and giving 4/6 post-dated cheques of periodic investment based on ones convenience. This disciplined approach to investing gives one the following advantages: a. Benefit of compounding b. Rupee Cost Averaging c. Convenience

a. Benefit of Compounding - The power of starting to invest now. There is always a "good reason' for not investing, but there is actually an even better reason to start investing right away. In fact, starting sooner rather than later is one of the best investment decisions you can make. If you asked your friend at a dinner party whether they are interested in becoming an investor, most people will say yes. If you then asked them why they haven't done so, a variety of reasons would probably come out. Some people simply don't feel that they know enough about investing, so they don't have the confidence to make a start. While most of us tend to procrastinate investment decisions for there is always some expenses, which assumes importance. The key to building wealth is to start investing early and to keep investing regularly. These regular amounts of savings no matter however small they may be shall possibly go a long way into creating a substantial amount of wealth over a long-term.

Illustration: If you invest Rs.1000 per month into a Mutual Fund with an asset allocation of 20% in equity fund and 80% in income fund (a conservative approach), which may possibly generate a return of 13%. The graph below show the wealth you would build by the time you retire at an age of 60 years depending upon when you start investing.

Thus we see how big the difference it makes if you start investing when you are 25 or when you are 30 almost double or a loss of Rs.41.02 lacs. While waiting for another 5 years would mean a loss of Rs.21.49lacs. Hence it pays to start investing early and regularly in life.

b. Rupee Cost Averaging - The power of disciplined investment Investing would be simple if you could always pick the best time to buy and sell. However, timing the market in this way is difficult. A better approach for most investors is Rupee Cost Averaging. With rupee costs averaging, you don't have to worry about where share prices or interest rates are headed. You simply invest a set amount of money on a regular basis over a long period of time. This approach over a long-term can help turn the odds in your favour. The idea is that you buy less when the market is up, and more when it is down - automatically.

Illustration: Say you have opted for Systematic Investment Plan, investing Rs.1000 per month into a scheme that had NAV of Rs.10, when you started investing.

Month

Amount (Rs.) 1,000 1,000 1,000 1,000 4,000

Invested Rising Market NAV Units Alloted 100.00 83.33 71.43 62.50 317.26

Falling Market NAV 10 8 6 4 28 7.00 Units Alloted 100.00 125.00 166.67 250.00 641.67

Volatile Market NAV 10 12 8 10 40 10.00 Units Alloted 100.00 83.33 125.00 100.00 408.33

1 2 3 4 Total

10 12 14 16 52

Average Purchase NAV 13.00 (Sum Total of NAV's/Total Number of investments made) Average costs per unit 12.61 (Sum Total of Investment/ Sum Total Units Alloted)

6.23

9.80

Thus we see that the average unit cost under Systematic Investment Plan will always be less than the average purchase price per unit irrespective of the market rising, falling or fluctuating. However, rupee cost averaging does not guarantee a profit. But with a sensible and long-term investment approach, rupee cost averaging can smooth out the market's ups and downs and reduce the risks of investing in volatile markets. Besides disciplined investing will avoid tempting you to spend your money before you can invest.

c. Convenience - Save oneself the trouble of going the same thing One does not have to take out time from ones busy schedule to make his investments. One has to just submit cheques with the completed enrollment form and one can relax. The mutual fund will deposit the cheques on the requested date and credit the units to ones account and will send the confirmation for the same. Every year Mutual Fund will give an account statement showing the amount of investments made at various time, total number of units held, the average cost of each unit and the market value of the investment.

So when is the best time to invest? This month, next month..every month, starting right now!

1. Light on the wallet Given that average per capital income of an Indian is approximately only Rs 25,000 (i.e. monthly income of Rs 2,083), a Rs 5,000 one-time entry in a mutual fund is still asking for a lot (2.4 times the monthly income!). And mutual funds were never meant to be elitist; far from it, the retail investor is as much a part of the mutual fund target audience as the next high networth investor. So if you cannot shell out Rs 5,000, that's not a huge stumbling block, take the SIP route and trigger your mutual fund investment with as low as Rs 500 (in most cases). 2. Makes market timing irrelevant If market lows give you the jitters and make you wish you had never invested in equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? Its because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record. 3. Helps you build for the future Most of us have needs that involve significant amounts of money, like child's education, daughter's marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But if you start saving a small amount every month/quarter through SIPs that is treated as sacred and that is set aside for some purpose, you have a far better chance of making that down payment on your house or getting your daughter married without drawing on your PF (provident fund). 4. Compounds returns The early bird gets the worm is not just a part of the jungle folklore. Even the 'early' investor gets a lion's share of the investment booty vis--vis the investor who comes in later. This is mainly due to a thumb rule of finance called 'compounding'. According to a study by Principal Mutual Fund if Investor Early and Investor Late begin investing Rs 1,000 monthly in a balanced fund (50:50 equity:debt) at 25 years and 30 years of age respectively, Investor Early will build a corpus of Rs 80 lakhs (Rs 8 million) at 60 years, which is twice the corpus of Rs 40 lakh (Rs 4 million) that Investor Late will accumulate. A gap of only 5 years results in a doubling of the investment corpus! That is why SIPs should become an investment habit. SIPs run over a period of time (decided by you) and help you avail of compounding. 5. Lowers the average cost SIPs work better as opposed to one-time investing. This is because of rupee-cost averaging. Under rupeecost averaging an investor typically buys more of a mutual fund unit when prices are low. On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors may even be pleased when prices fall because the fixed rupee investment would now fetch more units.

Systematic Investment Plan An existing unit holder can benefit under this plan of the Scheme by investing specified amounts for a minimum period of 12 months, on a monthly or quarterly basis. Month Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Total RIP (Rs.) Total Credit (Units) Average NAV per Unit ( Rs. ) Average Cost Per Unit ( Rs. ) Month Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Total RIP (Rs.) Total Credit (Units) Average NAV Per Unit ( Rs. ) Average Cost Per Unit ( Rs. ) Month Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Total RIP (Rs.) Total Credit (Units) Average NAV Per Unit (Rs.) Average Cost Per Unit ( Rs. ) 10.13 10.12 RIP / SIP Rs. 1000 1000 1000 1000 1000 1000 6000 592.640 NAV Rs. 10.00 10.15 10.05 10.20 10.08 10.27 9.50 9.49 Fluctuating Market Units Credit 100.000 98.522 99.502 98.039 99.206 97.371 RIP / SIP Rs. 1000 1000 1000 1000 1000 1000 6000 632.398 NAV Rs. 10.00 9.80 9.60 9.40 9.20 9.00 10.32 10.31 Falling Market Units Credit 100.000 102.041 104.167 106.383 108.696 111.111 RIP / SIP ( Rs. ) 1000 1000 1000 1000 1000 1000 6000 581.749 NAV ( Rs. ) 10.00 10.13 10.25 10.38 10.51 10.64 Rising Market Units Credit 100.000 98.717 97.561 96.339 95.147 93.985