HOW SIP WORK ?

Every now & then we heard about SIP Investment in Mutual Fund,But millinoare dollar question how to go about it, so answer lies here:-

A thumb rule of investment is that one must not take too much risk & still get inflation beating return. One way of ensuring this is Systematic investment plans (SIPs), in which a person can invest in a disciplined manner at regular intervals without being too adventurous.

Everyone has financial Goals such as buying a House or Car, Children's Marriage and Education and building a Retirement Corpus. You can allocate different amounts towards these based on the time you have for meeting these Goals. If you want to invest for your retirement, go for an equity fund. Invest in equities for any Goal which is five years plus  to seven years away. For example your child's education, go for a Equity Large-Cap Fund or an Multicap Fund. If the goal is immediate, such as buying a car or house, you can choose a less Risky & Volatile option such as a Hybrid Fund.

"In volatile markets, it is always good to go on a SIP mode as it helps one get the benefit of cost averaging over time. As markets keep rising and falling all the time, the cost of buying units is averaged out over time as the investor gets more units when markets are down.

BENEFITS OF SIP :-

Ensures Disciplined Investing:- There will always be times when the urge to splurge is high. This makes it difficult to contribute towards creation of a large corpus over a long period. SIPs enable you to do this by the discipline they impose. Since the amount gets invested automatically at fixed intervals, the chances of you continuing the investment for a long period are higher.

First decide the allocation, that is, how much money will go into what type of funds. Focus on three types:- Large Cap/Small Cap/MidCap Funds and Debt funds. "A typical allocation should be 50% in Large Cap Funds, 20-30 % in Small Midcap Funds and the rest in Multicap funds," he says.

Second decide the number of schemes in your portfolio. Given that we have three prime Asset classes, the portfolio should have at least three schemes," he says. An ideal number is five to four Equity and one Debt. Thereafter, one should choose the schemes based on the advice of the financial planner or after research that takes into account risk-adjusted returns over a period.

Riding Through Volatility:- If you are among those who are nervous about investing in equity funds because of market ups and downs, SIP will work best for you. It not only minimises the risk of losses due to fall in equity markets but also saves you the hassle of timing the markets, i.e. investing when they are trading lower and exiting when they are rising.

In the last five years, the broader market, the BSE Sensex, has moved from 18,000 levels to 26,000, albeit with huge volatility. Now, let us assume you invested Rs 10,000 every month into an Index Exchange Traded Fund (ETF) between September 2010 and September 2015. Your investment of Rs. 6 lakh would have grown to Rs. 8.04 lakh today with 11 %  Compounded Annual Growth Rate (CAGR). The Lump Sum Investment would have grown at 8% CAGR. The higher SIP return is due to the fact that you bought at various levels, both when the market was rising as well as when it was falling, averaging your cost. The average SIP return of large-cap diversified equity funds during the period was 14 %. Diversified Equity Funds are actively managed and hence are able to deliver superior returns.

"We recommend SIP to retail investors whose time frame is not less than 7 to 10 years to avoid ill-timing the market. This is because there have been instances of negative point-to-point returns over Seven to Eight years .

Power of Compounding:- A SIP allows you to gain from the power of compounding if you are investing for goals that are some years away. An amount of Rs. 10,000 invested every month for 10 years will grow to Rs. 23 lakh at a modest CAGR of 12 %. Everyone has financial goals such as buying a house or car, children's marriage and education and building a retirement corpus. You can allocate different amounts towards these based on the time you have for meeting these goals. If you want to invest for your retirement, go for an equity fund. Invest in equities for any goal which is five to seven years away, says Gaurav Mashruwala, Certified Financial Planner. For your Child's Education, go for a Large-Cap Fund or an Index fund. If the goal is immediate, such as buying a car or house, you can choose a less risky option such as a Hybrid Fund.

Value Averaging Plan:- Under VIP, the investor sets a target for monthly growth and adjusts the invested amount according to the performance of his fund. Take a person who invests Rs. 5,000 in a fund and sets a 12 % growth target every year. Therefore, he expects his fund to return one per cent every month. This means his investment should become Rs. 5,050 by the end of the one-month period. However,  if his investment grows only to Rs. 5,025 . Next month he will increase the amount to Rs5,025. If it grows by Rs. 100 to Rs. 5,100,  he will invest only Rs. 4,900 instead of Rs. 5,000.  This means the person deploys more money when markets are down and less when they are up. Hence, he buys more units on dips. "However, the downside is that your savings rate remains volatile.

DOES SIP ALWAYS WORK?

SIPs underperform in a consistently rising market as its main advantage of cost averaging is not realised in such a case. You end up investing at higher prices and keep getting fewer units. Take the period from 2004 to 2008, when the Nifty moved up from 2,000 to 6,000 levels. During this period, had you invested Rs. 5,000 a month from January 2004 until December 2007 (before the financial meltdown), your investment would have been worth Rs. 5.75 lakh until then.

In comparison, if you had invested Rs. 2.4 lakh (Rs5,000x48 months) as a Lump Sum in January 2004, your money would have grown to Rs. 7.8 lakh. Subsequent events, however, would have negated all the gains. In 2008, the Nifty fell from 6,000-odd levels to 2,500. Anyone who invested a lump sum would have had all his gains wiped out in a single year..

"Anytime is a good time to start a SIP provided its link to your Financial Goals”.