Systematic Investment Plan (“SIP”) : Solution for all market condition

Mutual fund’s Systematic Investment plan (“SIP”) enables you to build a portfolio over longer time horizon with small investments at regular intervals reducing the risk of market volatility. An individual should save around 30% of the monthly income to secure financial future. This 30% should be used to pay towards debt repayment (if any) and towards SIP. SIP is Similar to that of Bank’s recurring deposit, However offer more flexibility and potentially higher return.

Key Benefits of SIP
1.       Timing the market is not necessary –
Sensex returned 27.9% for CY 2017 and up +2.5% (YTD for the first 15 days of CY 2018). Indian Equity markets of late have been on a roll. Many investors have been skeptical about Government reforms initiative be it GST, demonetization, Bank recapitalization and Others have been skeptical on valuation and are waiting for a correction. Indian Broad markets (Nifty & Sensex) have generated a CAGR return of 14% for the last 17 year period (since 2000). Indian economy is expected to be the fastest growing economy for the next decade. This provides a strong case for investing in indian equity with realistic return expectation of 12-14%; however its not possible to time the market. Thus systematic investment approach would be a great way to manage volatility and initiate/increase the exposure to equity markets.
2.       Long term financial goal can be aligned with SIP
 Any financial goal (retirement, kids education, home buying etc) with investment horizon of above 3-4 years can be effectively planned with SIP. Earlier you start planning for your goals , easier it is to achieve.

Your investment of monthly SIP of Rs 10,000 @ 12% CAGR return over different time horizon is as shown below

SIP Period
5
10
15
20
25
30
Investment Amount
          600,000
         1,200,000
         1,800,000
         2,400,000
           3,000,000
           3,600,000
Value
          816,697
         2,300,387
         4,995,802
         9,892,554
         18,788,466
         34,949,641

A monthly SIP of RS 10,000 over 30 years , would create a wealth of Re 3.49 Crores. Any long-term goals should be planned with equities and SIP is a great way to go about it.

Conclusion

SIP are great investment option when it comes to achieving long term financial goals and best way to build position/exposure to equity asset class for an risk averse investor. It also instills investment discipline. Appropriate level of SIP, choosing right asset allocation and timely re balancing is essential for achieving the target.

Investments in Mutual fund are subject to market risk; Veerappan Aiyappan,CFA,FRM is an investment professional with more than a decade experience spanning across investment consulting, fund management & investment advisory. for Investment related professional advise feel free to get in touch with me on 0965-65708812.

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