Mutual Funds have gained huge popularity amongst the investors in the last few years. Prominent features like diverse options to invest in various asset classes, the advantage of flexibility to invest any time, easy withdrawal, handsome return and high level of safety have contributed to MFs’ growth. Mutual fund corpus is handled by highly skilled and proficient fund managers, which assures investors that their money is in the right hands.
Basically, there are two ways to invest in Mutual Funds i.e. lump sum investment and through systematic investment plan (SIP). People who have a large amount to invest opt for a lump sum investment option to get a good return, while those who want to invest a certain amount every month for medium to long term period prefer to invest through SIP.
Benefits Of SIP Investment
In a simple SIP, the amount that you invest every month remains fixed for the entire tenure of investment. A simple SIP gives you the benefit of rupee cost averaging over a period of investment. The underlying benefit of investing in simple SIP is that when the Net Asset Value (NAV) is high, less number of units are added to your folio, but when the market falls and the NAV is lower, then a greater number of mutual fund units are purchased in your folio. So, buying more units in a low market and less unit when markets are on an upswing results in profit in the long-term.
Even if the market falls and becomes volatile, the investor stays close to the profit line. Another benefit of simple SIP is that you don’t need to time the market. Investment continues in every situation. Since the amount of simple SIP remains constant, therefore it gives remarkable profit to the investors.
| Rupee cost averaging benefit of SIP | |||||
| Month No | SIP Amount (In Rs) |
NAV | NAV movement | Unit | Change in Unit |
| 1 | 1000 | 20 | NAV increases | 50 | Number of unit purchase falls |
| 2 | 1000 | 21 | 47.619 | ||
| 3 | 1000 | 22 | 45.455 | ||
| 4 | 1000 | 21 | NAV falls | 47.619 | Number of unit purchased increases |
| 5 | 1000 | 20 | 50.000 | ||
| 6 | 1000 | 19 | 52.632 | ||
| 7 | 1000 | 18 | 55.556 | ||
| 8 | 1000 | 17 | 58.824 | ||
| 9 | 1000 | 18 | NAV again increases | 55.556 | Number of unit purchased again falls |
| 10 | 1000 | 19 | 52.632 | ||
| 11 | 1000 | 20 | 50.000 | ||
| 12 | 1000 | 21 | 47.619 | ||
| Total | 12000 | 613.509 | |||
| Value of Investment after 12 months (In Rs) (Assuming NAV to be 21)- 613.509×21 |
12883.69922 | ||||
| SIP- Annualised ROI | 13% (Approx.) | ||||
| Increase in NAV from initial month (% Pa)– ((21-20)/20) | 5% | ||||
| * All figures are assumed for illustration | |||||
The above illustration clearly indicates that despite the volatility in the NAV, SIP can give good returns due to the benefit of rupee cost averaging. SIP gave a return of around 13% per annum, however, if you would have made a lump sum investment, then the return would have been 5% p.a. in that period.
Modified SIP Version
Some Mutual Fund companies have started offering a different version of SIP that focuses on Value Averaging Investment and therefore it is called VIP. Under VIP, the investment instalment does not remain fixed till complete tenure. The instalment size decreases when the NAV is high, however, as the NAV falls below a certain level, the instalment size increases with an underlying assumption that the investor will get greater benefit once the NAV again starts increasing.
Why You Should Keep SIP Simple?
Under simple SIP, the investor keeps the amount constant, therefore, irrespective of whether the market is expected to go higher or it is on the downward trend, the investment process continues the same way and investors don’t need to intervene in any way. Under VIP, when the market falls, an investor needs to keep the extra fund ready so that more units could be purchased, it requires direct involvement of the investor consistently. Also, there is no mechanism to ascertain that how much market will fall, when it will bounce back or where is the bottom when the market falls, therefore the difficulty to time the market makes an investment like VIP to be less attractive for the investors.
There is another type of SIP which allocates a higher share of investment in debt scheme and lower to equity when the market is higher, and invest a lower amount in debt scheme and higher in an equity scheme when the equity market falls to a lower level.
The idea behind such modified SIP schemes is to insulate investors from the loss and at the same time give them higher return, however, the simple SIP scheme performs best when the market is volatile as it allows better Rupee cost averaging.
If the investor is looking for tension free and easy way to invest the money in the mutual fund, then simple SIP is the best option for such investors.
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