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More on Systematic Investment Plan (SIP) and Micro SIP
(The article has been inspired by a question from the reader “rikinj”)
| (Have you read the earlier article on SIPs? Go ahead and read "Systematic Investment Plan (SIP) - A rupee a day, keeps worries away") |
Why a Systematic Investment Plan (SIP) is better than a Lump-Sum investment
A question that is asked very often is: Don’t one-time, lump-sum investments give better returns than SIPs?
And the answer is, yes, most definitely.
Shocked? Well, don’t be. Because that "yes" comes with a big disclaimer: A lump sum investment can earn you the best return if it is timed right.
This means that it has to be timed right twice: For the purchase, and for the sale. If you are able to buy at the very bottom, and if you are able to sell at the very top of the price movement, you can make the best return.
The obvious question is: Can you time it right, twice, all the time?
The answer is: No. And the answer is "no" not just for small investors like you and me, but also for professional investors.
One can time the market maybe once or twice, but that would be just coincidence. There is no way anyone can consistently time the market. Because no one can know for sure if the bottom has been reached, or if the top has been achieved.
And therefore, although theoretically it is possible to earn superior returns by making one-time, lump-sum investments, practically, a systematic investment plan is the best available option.
Want to know why? Please read "Systematic Investment Plan (SIP) - A rupee a day, keeps worries away".
Now remember, analysis done by looking into the rear view mirror can draw different conclusions. Let me explain.
If you look at the historic data, and see the return given by a stock or a mutual fund (MF) scheme between its bottom and its top, it would always be more than the return given by an SIP in the same period.
(And that’s why I said that theoretically, it is possible to earn superior return by making one-time, lump-sum investments)
But the important point to remember is that when analyzing historic data, you know where the bottom and top were. But while buying or selling in real time, you don’t know how the price would shape up in the future.
And therefore, practically speaking, an SIP is the best option available for long term investors.
Options available for investing in a Systematic Investment Plan (SIP)
Ok, now that we are clear that SIP is the way to go, let’s understand the various options available for SIP investments.
I would broadly classify SIPs into two classes: Regular SIP, and Micro SIP.
Regular SIP: These are the traditional SIPs as we know them. Following are their characteristics:
- The investment minimum usually starts at Rs. 500, and there is no maximum
- The normal entry load is between 1.5% & 2.25%
- There is usually no exit load
- There is usually no lock-in period
- All investment options are open: Growth, Dividend and Dividend Reinvestment (Please read "Mutual Funds - Growth or Dividend option?" to know more about these options)
- All mutual fund (MF) houses offer this SIP option
Micro SIP: These are the new breed of SIPs, which cater specifically to people who want to divert their savings, very small in amount, into mutual funds (and therefore into the stock markets). Following are their characteristics:
- The investment minimum can be as low as Rs. 50
- The normal entry load is between 1.5% & 2.25%
- There is usually a lock-in period, ranging from 3 to 5 years. This means you have to continue investing every month for this period.
- There usually is a more-than-average exit load (say 3% to 4%)
- Usually, only Growth option is available
- Companies like Reliance Mutual Fund (Reliance AMC) and ICICI Mutual Fund (ICICI Prudential AMC) have pioneered it, although most other fund houses are expected to follow
Ok, so we see that there are many limitations for a micro SIP. But are they necessarily bad?
In my opinion, they aren’t – because most of the limitations just make you invest in the MF scheme for the long term. And that’s how investments in equity mutual funds should be! (To know more, please read "Stocks - The winning bet for the long term")
It is no different from a recurring deposit in a bank, which forces you to make small, monthly payments for a pre-determined period of time, and which has a penalty for withdrawing before time.
The only difference is that the micro SIP would give returns that can far surpass returns given by a recurring deposit!
(Continue to Page 2 to know "How to invest in a Systematic Investment Plan (SIP)")
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Note: Please treat the opinion expressed here as a broad suggestion. Please consult your financial planner / investment advisor before making any investment decision.
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Jun 28, 2008
Jul 03, 2008
Jul 28, 2008
mainly, my query is that with bless from god i will become dad in next november.
i want to invest in sip scheme for long time. something around rs. 2000 p.m. so, i can save a better amount for my child's future education.
i also want insurance cover wiht that.
so, please advise me for the best availbale schemes, conatact no., its benefits & others & oblige
Thanks for the compliments!
Congratulations to you - I am sure these would be very exiting days for you!
And congratulations again to you - for thinking very clearly, and planning to invest from the birth of your child itself - I just wish everyone would think as smartly as you!
I would suggest that you separate investment and insurance. Although there are SIPs that come with insurance cover, I feel that you should go in for SIP and insurance separately.
MF schemes offering insurance are very limited, so it would severly limit your choice of MF scheme.
It would be better to invest in a regular diversified equity fund. Since you want to invest for the long term - which is very good - you can invest Rs. 1000 in two funds each.
You can opt for any existing diversified equity fund with a good track record - a fund which has given a consistently good return over the last 3 or 5 years.
A good website to check out funds would be http://www.valueresearchonline.com
You can also do your research on many finance websites on the internet.
As far as insurance goes, I suggest you buy term insurance plan. This is available from all insurers, and would provide you insurance at a very low cost.
(To know more about term insurance, please read "Term Policy Is The Best Policy")
This way, you would get enough insurance, and would be able to keep investment and insurance separate!!
Once again, congratulations. And happy parenting!!
Aug 08, 2008
I am not sure if I understand your question correctly...
Can you please clarify?
Thanks.
Nov 26, 2008
Now a days market is continuously fluctuating and so I want to quit from SIP. Pl. inform the benefits & drawbacks
Sathy Anil
I know this is a question troubling most investors these days.
That's why, I have written an article for the same - please check out "Do you have an SIP? Don’t stop it!".
Happy investing!
Feb 12, 2009
i am looking out for gud childrens plan which will take of
major events like childs, health, education, marriage.
i am not sure whether to go for a regular childerns plan or go in for a sip kind of investment in mutual funds.
please suggest me the best option.
I personally believe that SIPs in MFs are a better choice. The best part is that you can choose from almost infinite fund schemes!
However, planning for your kids' furture using SIPs takes a lot of descipline, and many of us find it quite difficult.
Dedicated children's plans come handy there - you pay fixed premiums for years, and they manage everything else. Of course, the trade-off is that you get less control.
So, you need to depending on how desciplined you can be!
Please find my requirements and suggest the better option to invest.
1) I have taken term insurance(Birla sun life dream plan) for exclusive insurance purpose.
2) I just entered into 30 and am a risk taker.
3) I wish to go for sip but I am interested in tax free returns.
Can you suggest which option such as sip kind of investment in mutual funds, sip kind of investment in ELSS, something like that. I hope your answer will be an answer to many.
First of all, congratulations for separating insurance from investment, and buying term insurance. Most people are unable to make this distinction, and suffer financially due to this.
When you invest in SIPs, you have a lock-in of 3 years. Which means that all gains would be long term gains, and there would be no income tax on it. So, this satisfies your condition.
(Please read "Long Term and Short Term Capital Gain - Income Tax Calculation" for more on taxation on gains from stocks)
Now, we need to choose between ELSS MFs and regular MFs.
Both ELSS MFs and equity diversified MFs give more or less similar returns. However, if we consider the tax saving due to investment in ELSS (section 80C), the returns are much better from ELSS MFs.
(Check out "Saving Income Tax – Understanding Section 80C Deductions" to know how you can save income tax)
So, if you haven't maxed out your section 80C investment, ELSS would be a better option. Please keep in mind though that each installment of the SIP in ELSS MFs would have a lock-in period of 3 years.
If tax saving is not a consideration, equity diversified mutual funds would be better, because you have a much wider choice available in that space.
Happy investing!
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