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Sunday, September 13, 2015

Myths about SIP investing

Systematic Investment Plan (SIP) is turning into a generic term; in fact, a few people think that SIP is an investment and some assume it happens only in a Mutual Fund. The reality is, “SIP is not an investment” it is a “method of investing” in an asset class. There are many misconceived notions on what SIP is all about and how it needs to be used. Here are a few myths about SIP that we would like to clarify, so that you may use SIPs more efficiently and build wealth optimally. A SIP is what you do when you invest in a recurring deposit in a bank. Today SIPs are also possible in equity shares.
Myth 1: Only Small investors go in for SIP
SIP stands for Systematic Investment Plan (SIP) and not Small Investors Plan. Hence, it is incorrect to be under the impression and mis-conception that SIP, is meant only for small investors.
SIP is meant to be a vehicle for disciplined, regular, long-term investment. It is meant to average rupee costs and provide an opportunity for all – those with limited as well as high savings – to participate in smart investment options.
Whether you invest Rs. 1,000 a month or Rs. 50,000 a month, rupee cost averaging works alike for all. You buy through ups and downs using an SIP, whether you are a small retail investor or a High Net-worth Individual (HNI). Whether it is a small or big amount, by investing regularly, you will reap the benefits of SIPs in the long term.
Myth 2: SIP should not be started when markets are high
Many investors are always trying to time the market. They do not understand that it is time in the market and not timing the market that is important. The most common question investors ask is – Is it the right time to start SIP? Obviously the correct answer is – Any time is a good time to starting SIP. One should always remember that SIPs shield the investor from market fluctuations with its systematic approach.
Myth 3: My SIP returns on an absolute basis are low
Many investors look at the absolute returns on their SIP investment. They ignore the Internal Rate of Return (IRR) of their investments. Generally, in a short term SIP, the absolute return tends to look lower than the IRR. XIRR is a better way of looking at your return, especially when you are comparing it across other asset class yields? Because in an SIP, you do not make all your investments at one go; you invest at various points in time. Hence, there is no one point-to-point annualised return. The returns, taking into account the varying intervals of investment, are better captured by using XIRR.
Myth 4: Lumpsum is better than SIP
This is one of the most common confusions that investors face – is a lump sum investment is better than an SIP? Let us explain this point with an example: Say 5 years back, markets were at 15,000 levels and now they are at around 30,000. Clearly, when you look back with the benefit of hindsight, you would have doubled your money in the last 5 years. Whereas using the SIP route you would have made a lesser return. BUT you need to answer 2 questions
Would you have really believed in 2009 when someone told you that the Sensex would be 30,000 in 5 years? You would have probably laughed; and secondly, Did you had enough money at that time to invest a huge sum at one go?
Lumpsum
SIP
Index name
Present value (Rs.)
CAGR (%)
Present value (Rs.)
XIRR (%)
S&P BSE SENSEX*
1,09,157
12.71
91,799
17.51
*Data taken from Feb 2010 – Jan 2015
Thus, by using SIP you were risking a lesser component of your corpus over a varied period of time. Just for your information; if you had invested Rs. 60,000 at one go 5 years back (From Feb 2010 – Jan 2015), the present value today would have been Rs. 1,09,157, translating into a CAGR of 12.71%. Now, for the same time frame, if you had invested via the SIP route i.e Rs. 1,000 every month, your present value would have been Rs. 91,799, delivering an XIRR of 17.51% (can be seen in the above table). In terms of percentage returns, the SIP made 17.51% XIRR, while the lumpsum CAGR was only 12.71%. But the value has increased more (Rs. 1,09,157) in the lumpsum investment compared to the SIP route (Rs. 91,799). This happened because for the lumpsum you invested for the entire period of 5 years. However, in the SIP, the total funds were not completely invested for the full term, since the money was invested in tranches at intervals. In the SIP, your last investment tranche has been invested for just 1 month.
Further, in case of SIP, the robust return you receive is despite the fact your investments would be subject to volatility at different levels. In fact, during the period, the Sensex touched a low of 15,695. Hope, this point clarifies myth 3 & 4.
Timing the market is a very risky bet, specifically for retail investors, you should stick to SIPs, as this will allow you to participate not only in the upswings of the market but also restrict losses in a falling market.
Myth 5: If I have committed to a SIP period, I cannot stop my SIP before that term or change the tenure
Another common myth about SIP investing, especially when it comes to SIPs in equity funds. Many investors believe that if they have committed to an SIP for a period of say 10 or 20 years, they cannot change the tenure or the amount. They believe that if they change the tenure or amount, they would be penalized. This is untrue.
A SIP can be continued till the desired date or can be stopped or terminated whenever one wishes to do so by giving a written request duly signed, allowing about one month for the fund to follow this instruction. Moreover, if you need to change the amount; all you need to do is stop the SIP and start a new SIP.
The above are some common myths about SIPs. We should know that SIPs bring discipline into our whole investment exercise. We must be free from such above-mentioned myths so that we can take well-informed decisions related to SIP investments. So JUST SIP IT !!

Sources :- http://invest-mantra.com/blog/

2 comments:

Peehu Sharma said...

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Shreya Verma said...

Thanks for sharing this interesting post.
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