When it comes to investments and personal finance management, there are quite a few options and instruments available in India. Based on your risk profile, risk appetite and liquidity requirements there are options like fixed or term deposits, postal deposits, recurring deposits, mutual funds (equity based), equities, gold investments, real estate, bonds etc.
As for the equity market linked investment opportunities, open-ended mutual funds are probably one of the easiest to pick and dispose (liquidity). Though, investing in mutual funds still has stock market linked risks, you are managing and reducing that risk by allowing your fund manager and fund house (e.g. HDFC, Reliance Capital, SBI etc) make investment decisions for you.
Investing in mutual funds through SIP (Systematic Investment Plan) for longer term will reduce these market linked risks further. Just in case you do not know what a SIP is, here’s the definition:
SIP is a method of investing regularly (e.g. monthly) in a mutual fund. It’s very similar to a recurring deposit whereby the investment amount is the same for each deposit, but you get to purchase a varying number of mutual fund units based on the current market price of the particular fund.
For example, when you open a SIP with Reliance Growth Fund for 2 years with a monthly recurring deposit of say Rs.1000/-, the amount that you invest per month is always fixed. But for a particular month, the Reliance Growth Fund’s market price (called NAV or Net Asset Value) may be Rs. 450 and some other month it may be Rs. 250 based on the equity market fluctuations. Hence, the number of units that you receive per month also varies. For example, when the mutual fund NAV is 450/- you get only 2.22 units for your thousand rupees where as when the NAV is 250/- you get 4 units (1000 / 250 = 4).
In other words, when the mutual fund NAVs are cheaper, you are getting more units and hence you average out your prices. e.g. based on the above two transactions for two months you are getting 6.22 units for 2000 rupees or your per unit cost is 2000 / 6.22 = ~321.54
My current Mutual Funds Portfolio
The following is my actual mutual fund portfolio as of June 28, 2010. I am not specifying the number of units or amount invested.
| Fund name | Investment Date | Overall Gain |
| Reliance Growth Fund | 22.02.2007 (SIP) | 65.67% |
| HDFC Tax Saver Fund | 15.01.2007 (SIP) | 47.44% |
| Reliance Vision Fund | 15.01.2007 (SIP) | 27.44% |
| HDFC Equity Fund | 08.08.2007 | 44.19% |
| SBI Magnum Global Fund | 08.06.2007 | 16.43% |
| Franklin Prima Plus Fund | 07.09.2007 | 5.65% |
| DSP Blackrock Focus 25 Fund | 14.05.2010 | 3.08% |
Off the above, the first three were done on Systematic Investment Plan with monthly contributions for at least 24 consecutive months (Ideally you need a much longer duration). You will notice that despite, the Sensex hitting 21,000 in December 2007 and correcting big time all the way to 8000 two years back, the funds invested via SIP are still returning a handsome positive figure. On the other hand the other funds which I invested also in 2007, returned digit figures the only exception being the HDFC Equity Fund which was like a fluke when it comes to timing.
The moral of the story is that SIPs for long term always return well while managing your risks.
6 Unique Advantages of SIP
The following are some of the major advantages of SIO or investing in mutual funds through Systematic Investment Plans.
#1 You don’t need to time the market
One of the key problems of investing in equities (or even mutual funds other than the SIP route) is that unless you time the market, you are in trouble. But in the case of SIPs you don’t have that issue – Just keep investing a fixed amount per month (or biweekly) via the SIP route for long term and the rest is taken care of. When the market is down you get more units and when the price is high you automatically buy smaller amounts, as explained above.
#2 It’s not a crime, if you miss one SIP installment
Unlike your bank loan EMIs, nobody will come after you with legal notice even if you miss one SIP installment due to lack of funds or you just forgot it. However, in order to make the best out of SIPs, you should have the disciplined approach of investing at the predetermined frequency without fail.
#3 High liquidity – You can terminate it any time
If you are investing in Open Ended mutual funds, you can terminate your investment at any point of time and get your deposited money in the bank within two business days. Unlike fixed deposits, there is no penalty for terminating a SIP earlier. Please note that tax saver funds usually have a lock in period of three years. This is not specific to SIP but about the nature of the tax free funds.
#4 Relatively low risk
Investing via SIPs offer reduced risk exposure to the stock markets as compared to putting money in bulk via funds or stocks. Basically, in long term you do the risk leveling without even you knowing about it and there is a automatic cushioning against the volatility of the stock market due to cost averaging.
#5 No special fees
Investing in SIPs do not need any special fees per month or at the time of opening. The entry load of the underlying instrument (i.e. the fund), if applicable, will be the only charges.
#6 Long Term Tax benfits
Unlike Fixed Deposits, the Mutual Funds enjoy long term tax benefits as the returns from these investments are not taxable if you hold them for more than a year at least. The same inherent benefit is available when you take the SIP route as well.
Summary
I hope you got some ideas about the Systematic Investment Plan and advantages of the same. Sorry if you already knew about it but this post was mainly meant for the newbies in personal finance. I shall talk about the Systematic Withdrawal Plan in another post.
Start your SIP today because any day is a good day for SIPs…
Happy Investing!
Disclaimer: It is highly advised to pick only the best and stable funds for SIP investment from well known fund houses such as HDFC Asset Management and Reliance Capital. Also, it’s not a good idea to enter SIPs on new fund offers (NFOs). There are a number of funds with proven track record of 5-10 years to choose from.
Further, I am not a Certified Personal Finance Advisor and this post is meant for educational purpose only. Always consult a qualified professional in this field or do your own homework before making your investment decisions.