In one of our recent articles we talked about how the individual investors are investing in India and the changing pattern of the investments over the years. As we saw, there was a visible change in the individual preferences for different asset classes and investment avenues with the trend clearly towards more of financial assets away from physical assets. Mutual funds, although still small, is making an impressive progress in gaining increasing share of the wallet.
The mutual fund industry today appears to have emerged stronger after going through challenging times of high volatility in equity markets and the fallout of the credit events in the debt market in recent years. One of the biggest positives for the mutual fund industry has been the huge surge in the retail investor participation in the equity markets especially through the systematic investment plan (SIP) route, primarily in equity-oriented funds.
In just about 3 years, the SIP accounts (not individual investors) have increased in the industry to approximately 2.84 crore from just 1 crore. In September 2019, the monthly SIP contribution to the industry was at Rs.8,263 crores, up from about Rs.3,700 crores exactly 3 years ago. The average SIP size stood at Rs.2,900 per SIP last month. The industry has been making quite a effort in promoting mutual funds and the "mutual fund sahi hai" campaign also has made a visible impact in spreading awareness.
The interesting part though is that the SIP registrations and the inflows have been steady inspite of the recent volatility in the markets. This shows that the investors are now increasingly looking at SIPs with a long-term view and are over-coming their behavioural instincts to react to less pleasant numbers /returns in short term. This is indeed a welcome thing in the industry and investors need to be appreciated and congratulated for this. The growing size of SIPs and the number of SIP investors showcases the habit of disciplined investing.
What is a SIP?
If you are wondering what an SIP is and what are it's advantages, read on... "Little drops of water make the mighty ocean" – this line holds very true for SIP. As the name suggests, Systematic Investment Plan or SIP, is an investment plan (methodology) offered by mutual funds wherein one could invest a fixed amount in a mutual fund scheme periodically at fixed intervals - say once a month instead of making a lump-sum investment. SIP is similar to a recurring deposit where you deposit a small /fixed amount every month.
Advantages of SIPs:
SIPs are often spoken by experts as the ideal way to invest in the equities. Here are a few basic advantages of investing in SIPs. Note that these advantages of only of the SIP methodology and we are not talking of the advantages of mutual funds here, which is something we would like to talk about someday later.
- Convenience: SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque or making payment each time. One can also start (or stop) a SIP online at the comfort of your home at any time with any of the distributors offering the online service.
- Flexibility: The SIPs are opened for a fixed tenure. However, one is free to stop, pause or register the SIP again at any point of time. One is also free to withdraw (redeem), in full or partial, your investments and take back money whenever you need it, even during the SIP tenor. Further, one can select any frequency for the SIP – from daily SIPs to even once every quarter to suit your need. One can also choose any particular date available for the monthly debit to your bank account. One can also choose to periodically and automatically increase the SIP instalment amount to match your contribution with your growing income /salary over many years.
- Suitability: The SIP instalment amount could be as small as ₹500 per month. There is however practically no upper limit on the amount of instalment or the number of SIPs or the number of funds to have SIP into. You can also choose to have an SIP in debt mutual fund schemes not just equity funds. Thus, needless to say, it can match up to the investment objective, needs and the pocket size of virtually every investor.
- Rupee Cost Averaging: Perhaps the most commonly quoted advantage of SIP is the Rupee Cost Averaging. Since the investors are investing in a disciplined manner they need not worry about market volatility and timing the market. With market volatility, there comes times when underlying stocks are either expensive or cheap. Since, one is investing regularly, automatically one buys more mutual fund units when there is a market correction. When the unit price goes up, he tends to gain. Over time, a SIP investor, while investing every month would end up buying more units when markets go down and buying less units when market goes up. Thus, his/her average cost of purchase of a unit would be relatively lower – this is phenomenon of rupee cost averaging.
- Long-Term Wealth Creation: The key to building wealth is to start investing early and to keep investing regularly. A small amount of money invested regularly can grow to a large sum. With SIP, one can potentially create a substantial amount of wealth with returns compounded over the years. When we look at the corpus accumulated at the end of the tenor, the wealth accumulation is at its best in the long run. As the time given to investment increases, the wealth builds at an accelerated pace because of compounding effect.
How to make best use of SIP:
Few things in short. First, have a SIP which is long-term in its tenor. The minimum horizon should be at least 5 years. One can have it for even 10 /20 /30 years. Relax, there is no commitment and one can switch scheme or stop SIP at any time. Second, one can have a Step-up / growing SIP which keeps adjusting itself to match your growth in income. Next, it is always preferable that you map or link or just consider your SIP to any life goal like child education or retirement and think on lines of goal achievement instead of just SIP.
Lastly, do not put all your eggs in one basket. It is advised that you have mutiple SIPs in different types of schemes if you are investing a sizable amount – say Rs.30,000 can be spread into 3 schemes of Rs.10,000 each. If all this sounds a bit too much, we strong advise you to contact a financial planner / mutual fund distributor to plan for your life goals and advice you on your wealth creation journey. If you still haven't started your SIP, what are you waiting for?