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Are systematic investment plans worth it?

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Now-a-days, with the effect of rising inflation, the importance of money is increasing day by day. Money has become the first priority in everyone’s life as it is needed in various stages of life at any time. In this expensive world, it is unwise to keep money idle.  So, the need is to make money from the money we have which can be achieved by making the right investments. Though the equity market gives good returns, it is highly volatile due to its constant rise and fall. Now, the question arises as to how can one safeguard their money from market volatility? The answer lies in Systematic Investment Plans in Equity.

What are SIPs?
The Systematic Investment Plan (SIP) is a simple plan to increase wealth over a long period of time in a disciplined manner.  It allows us to invest in the stock market by way of mutual funds so that you can beat the ups and downs in the market by averaging your cost and diversifying across sectors. Equity SIPs of different amounts and time periods are offered by many brokers like ICICI Direct, HDFC securities, Reliance Securities , Kotak Securities , Geojit BNP Paribas Financial Services , Motilal Oswal Financial Services and IIFL.

Who can deal in the Equity market?
Anyone can enter the equity market and build their own portfolio through DIY-SIP in equities, a product offered by HDFC securities. DIY SIP stands for Do It Yourself Systematic Investment Plan. Another option is the Reliance Securities of the Anil Ambani group introduced RSP (Research Stock Purchase). DIY-SIP allows the customers to enter in the market with small investments. It provides a systematic way to gain direct exposure in the equity markets. ICICI started the new concept of equity SIPs on the lines of mutual funds. It invests a fixed amount every month or invests in a fixed number of stocks daily where one can invest in any blue chip funds or Exchange Traded Fund (ETF).

About Blue Chip Funds
Blue chip value funds provide updates on monthly holdings on or around the 15th of each month .There are several ways to invest in Blue Chip Funds. Shares can directly be acquired by the investors through a broker, a direct stock purchase plan or a dividend investment plan.

Investing Do’s and Don’ts
  • When one is investing in the market, they should first analyze the market.
  • While investing, one should keep some amount aside as a reserve.
  • People should invest in small sums and must diversify their investments. One should never keep all eggs in a single basket.  
  • Investing in small amount is also helpful as then, in case of a loss, the amount can be recovered easily.  
  • Equity SIP is a method by which customers have the option to invest their funds at a particular fixed frequency of time. It allows systematic investment in a disciplined way.
  • SIPs generate returns over a long period of time; they do not give results immediately. One has to be patient while investing in SIPs and be prepared to give it some time to fructify.
  • When the market is high you should buy less number of shares, and when the market is low you should buy more number of shares. Get the benefits compounded over a period of time.
Money should always be in routed form. This means that if you are investing some amount than you should also get some returns on it, in other words, you should assess your Return on Investment or ROI. There should be a money life cycle.

With Systematic Investment Plan, it is a customer’s choice to invest at specified frequencies which may be daily, weekly or monthly. You need to vary only the amount of the investment every time you buy the stocks, depending on the stock price in the market. One should invest more when the market is down and should sell it when the market is up so that lesser investment can earn you more returns. Investment can be done in various means like in gold, shares, debt instruments or a combination. The amount to be invested can be transferred through a cheque or online from your account.

Simple Steps to Wealth Creation
Start Early – be the first to take the first step

Consider the following scenarios where different investors start investments at different age levels and invest Rs 2000 per month till the age of 60 years. The person who started investing at the age of 25 years stands benefitted more as he has started early and can benefit from power of compounding. Even a higher investment amount may not compensate for the growth potential of starting early.
Invest in the Right asset class – Risk return balance to optimize growth

Inflation for the past 18 years has been on an average at 6.43% on CAGR basis; an investor should always look at an asset class which has the potential to generate positive inflation adjusted returns. Historically on analysis for the past 25 years, equity as an asset class has the potential to beat inflation and generate positive post tax and inflation adjusted returns. (Refer to the chart below) 
                          
Rising expenses and falling value of money are the Income punctures which every one faces. Also, Lifestyle Inflation is leading to many luxuries becoming necessities over the last few years, a trend which will continue even in future. A mobile which was not necessary 10 years back has become one now.
So, how do beat inflation and meet my future goals? It would require simple rearrangement of priorities.
Savings can contribute towards realizing one's aspirations and achieving a comfortable lifestyle even post retirement. However how do we beat inflation and create wealth?

Benefits of Systematic Investment Plan
  • Systematic Investment Plan allows you to buy more number of units as the market moves down and less units as markets moves up.
  • Reduces risk by spreading investments over a longer period of time at various levels of the market.
  • Reduces cost of Investment in Fluctuating Markets.
  • Consistent and continuous implementation of these strategies.
Rupee Cost Averaging
Rupee Cost Averaging is an effective investment strategy that eliminates the need to time the markets. All you have to do is invest a fixed, pre-decided amount of money on a regular basis over a long period of time. Since the amount invested per month is constant, you buy more units when the price is low and fewer units when the price is high. The table given below clearly illustrates the concept.
As mentioned above, the average price for the investment is Rs. 9.97 and 1003 units would have been purchased. However in the event of the lump sum purchase the price of investment would have been 10 with only 1000 units purchased. The concept of Rupee Cost Averaging is to invest across market cycles thus bringing the cost price down, which contributes to the returns of the investors.
SMART INVESTOR PLAN – Practical Report
The chart below shows the performance of Rs. 2000 SIP in BSES Sensex for different time period. The chart clearly shows how the following the SMART INVESTMENT PLAN helps reap benefits over a longer period of time.

MF may not be the cure-for-all as it is being told to all of us.
 
Personally, I would  suggest allocating a part of your portfolio to ETFs (apart from the regular SIPs I do in MF). Whenever You see Nifty P/E going below 20, to invest some amount in Nifty ETF. Your plan is to keep doing this regularly and may also reduce my SIP amount for a given month if You see Nifty P/E going below 20 and put this money in ETF. Or even skip my MF SIP in favour of ETF if it goes below 18.
http://investinnedu.blogspot.com/2016/11/cons-of-day-trading.html

 
What do you think? Do you think it makes sense to start looking at ETFs a little more seriously in near future?

Time is the KEY in the markets: The longer you invest, greater the benefits


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