Investors have two options of investing in mutual funds—lump sum investment or through a Systematic Investment Plan (SIP). Between these two options, experts opine that SIP is superior. And for good reason too. Here is a closer look at why SIP is a better way to invest in mutual funds.
- Encourages discipline:
Discipline is key to successful investing. Just as you get fitter faster by exercising a little every day compared to exercising once a week, similarly, a SIP encourages discipline in investing; it gets you closer to your financial goals faster than a one-time investment. It does away with emotional investing, thus, leading to a balanced and rational approach to investing.
- No need for huge investment capital:
Many SIPs allow you to invest in as little as Rs 500 a month. There is no cap on the maximum amount, so you can invest as much as you wish. So, Aesha, who is just starting her career, has a monthly SIP of Rs 1000 attached to a tax-saving mutual fund. She saves on tax while she earns good returns in the long run on her small investment.
- Eliminates the need for timing the market:
No one can time the markets even though people do try. Having a SIP eliminates the need for timing the market. You don’t need to research market conditions for the best times to invest or sell, and so on. It also saves you the hassle of remembering to invest regularly.
- Power of compounding:
SIP works best for the long term as the power of compounding helps to boost the portfolio manifolds.
In compounding, you earn on the total amount invested (i.e. the principal amount as well as the returns) and hence the entire portfolio returns increases, especially if the tenure is longer.
Thus, the earlier you start investing in a SIP and the longer you remain invested makes a difference in the returns you garner.
Example: Tanya has invested a total of Rs 24,000 for five years.
|
Year |
Opening balance (Rs) |
Investment (Rs) |
10% Return (Rs) |
Closing balance (Rs) |
|
1 |
|
24000 |
2400 |
26400 |
|
2 |
26400 |
24000 |
5040 |
55440 |
|
3 |
55440 |
24000 |
7944 |
87384 |
|
4 |
87384 |
24000 |
11138 |
122522 |
|
5 |
122522 |
24000 |
14652 |
161175 |
|
|
|
120000 |
41175 |
|
Tanya’s total investment at the end of 5 years is Rs 12,0000.
The value of her investment is Rs 16,1175.
The total returns earned is Rs 41,175.
- Rupee cost averaging benefit:
With a SIP, you buy more mutual fund units when the markets are low, and fewer units when they are high. So SIPs help mitigate market volatility due to their exposure to equities. This strategy works to your benefit as the cost of your investment averages out in the long term, which is the benefit of rupee cost averaging.
Example: Sourav invested Rs 1000 in a SIP; here is how rupee cost averaging works out for him:
|
Date |
SIP amount (Rs) |
Price per unit (Rs) |
No. of units bought |
Investment Value (Rs) |
|
Jan-21 |
1000 |
25 |
40.00 |
1000.00 |
|
Feb-21 |
1000 |
23.3 |
42.92 |
1932.00 |
|
Mar-21 |
1000 |
24 |
41.67 |
2990.04 |
|
Apr-21 |
1000 |
27 |
37.04 |
4363.80 |
|
May-21 |
1000 |
24.5 |
40.82 |
4959.74 |
|
Jun-21 |
1000 |
25 |
40.00 |
6060.96 |
|
Jul-21 |
1000 |
18.5 |
54.05 |
5485.11 |
|
Aug-21 |
1000 |
23.3 |
42.92 |
7908.28 |
|
Sep-21 |
1000 |
19 |
52.63 |
7448.81 |
|
Oct-21 |
1000 |
22 |
45.45 |
9624.94 |
|
Nov-21 |
1000 |
24 |
41.67 |
11499.93 |
|
Dec-21 |
1000 |
26 |
38.46 |
13458.26 |
|
Total |
12000 |
|
517.63 |
13458.26 |
|
Average |
1000 |
23.47 |
43.14 |
|
The price per unit via SIP averages out to Rs 23.47 and the final value of his investment is Rs 14,754.83 as against his investment of Rs 13,458.26.
Compare this to the table below where if he invested a lump sum amount of Rs 12000, the final value of his investment would be only Rs.
|
Date |
Lump Sum amount Rs |
Price per unit (Rs) |
No. of units bought |
Final Investment Value (Rs) |
|
Jan-21 |
12000 |
25 |
480 |
12000 |
|
Feb-21 |
|
23.3 |
|
11184 |
|
Mar-21 |
|
24 |
|
11520 |
|
Apr-21 |
|
27 |
|
12960 |
|
May-21 |
|
24.5 |
|
11760 |
|
Jun-21 |
|
25 |
|
12000 |
|
Jul-21 |
|
18.5 |
|
8880 |
|
Aug-21 |
|
23.3 |
|
11184 |
|
Sep-21 |
|
19 |
|
9120 |
|
Oct-21 |
|
22 |
|
10560 |
|
Nov-21 |
|
24 |
|
11520 |
|
Dec-21 |
|
26 |
|
12480 |
|
Total |
12000 |
|
480 |
12480 |
|
Average |
1000 |
25 |
40 |
|
Thus, the average cost is low in a fluctuating market with systematic investment rather than lumpsum.
Summing up
Remember, to make the most of your SIP investment, start early and stay invested for at least 5 to 7 years. Avoid withdrawals, stay disciplined, and earn a wealth corpus in the long-term. Don’t delay; start a SIP today!