systematic investment plan idea

7/28/2019 Systematic Investment Plan Idea

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www.PersonalFN.com 2

Preface

Many investors deploy their savings in the capital markets, with the objective of creating wealth

and planning their finances. But very often ignore to invest more systematically, and often act

on the tips provided by friends and relatives. For some enjoying the thrill of roller coaster ride

(ups and downs) of the capital markets gives a high which they often mistaken to be systematic

investing. Mind you no one can time the markets well, and if you try to do the same you are not

investing systematically, but rather doing some trading activity which can surely give you a high,

but does no good to your long-term objective of wealth creation.

While planning your investments, it is imperative that you invest regularly and systematically

by having the right investment insights which will enable you to build wealth over the long-term.

Taking into account few rules of financial planning, will also be beneficial for your investment

portfolio, and help you to meet your financial goals.

Remember, if you do not have the right perspective, mutual fund investing could be a

conundrum, and you could go down the wrong path, reaching an unwanted destination.

Hence, in such a case it is imperative that you understand various nuances that go into mutual

fund investments. To understand all this requires some words of experience.

Through this guide, we have tried to capture our expertise and experience for your benefit. This

will enable you to understand the wise and systematic way of investing through SIPs (Systematic

Investment Plans) and debunk some of the misconceptions of SIP investing.

We hope it will be informative reading and wish you a VERY HAPPY INVESTING!!

TeamPersonal FN


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Disclaimer

This Guide is for Private Circulation only and not for sale, is only for information purposes and Quantum

Information Services Private Limited (PersonalFN) is not providing any professional / investment advice through it

and, does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or

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as to any matter/content contained in this guide, including without limitation the implied warranties of

merchantability and fitness for a particular purpose. PersonalFN and its subsidiaries / affiliates / sponsors / trustee

or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability

incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions

based on the contents of this guide. Use of this guide is at the users own risk. The user must make his own

investment decisions based on his specific investment objective and financial position and using such independent

advisors as he believes necessary. Personal FN does not warrant completeness or accuracy of any information

published in this guide. All intellectual property rights emerging from this guide are and shall rem ain with Personal

FN. This guide is for users personal use and the user shall not resell, copy, or redistribute this guide, or use it for any

commercial purpose.


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Index

Section I:Introduction

The thrill that kills!! 5

Section II: A SIP a can keep your financial worries away

What is a SIP? 8

4 good reasons for investing through SIP 9

Section III: A SIP can make your financial dreams come true 12

Section IV: Choosing the right mutual fund schemes for SIPs 17

Section V: Debunking some common myths about SIP investing 23

Section VI: Your take home points

How should I register for a SIP? 26

Section VII: Annexure 28


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I - Introduction

The Thrill that kills!

The capital markets are the tantalizing pulse of any economy, as thecapital market indices to an extent reveal the confidence of investors

(both domestic as well as foreign) in the economy. But, in the

journey of betting in the capital markets, investors often tend to get

thrilled, and often indulge in trading / gambling rather than

investing. They tend to time the markets, rather than invest

regularly. Well, while trading / gambling might give you excitement, in the long run the stock market

excitement might be hazardous to your wealth as well as your health. Remember, a trader is good only

till his last trade. You dont know what the future has in store for you good, bad or ugly?

Take the case of the year 2007. The Indian equity markets were roaring. Lots of IPOs (Intial Public

Offers), NFO (New Fund Offers), all analysts giving buy calls on stocks as well as mutual funds etc. - there

was lots of positive excitement!

But who knew what the future had in store. In the year 2008 U.S. Sub-prime mortgage crisis emerged,

global banks went bust and the global economy went tumbling down into a recession, causing pain that

went on for almost a year and a half.


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(Source: ACE MF,PersonalFN Research)

Today, the scenario is different. Many would say that we have recovered. Yes, no doubt we have

recovered; but the global economic recovery post recession is fragile, as U.S. economy is still under a lot

of debt burden (the debt-to-GDP ratio stands at 93%), though of late it has managed to show recovery

(growth for the fourth quarter of 2011 was at 3.0%). Even the Euro zone is not completely out of the

woods. Though Greece has managed to get another dose of bailout $130 billion, there is no clear

roadmap as to how it will honour its future debt payment and bring down its debt.

So, if you were excited in the bullish phase of 2006 and 2007, and acted on the wrong advice provided

by someone telling you to pump in more money in lump sum, you would have still been wondering

today how to recover the lost money.

In our opinion investors, both new as well as existing ones should refrain from making such a mistake

again and invest your money in a systematic manner in the capital markets.

Remember a thrill can give you a kick, but the kick can kick you out.


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II - A SIP can keep your financial worries away

Now, in the market conditions seen above (turmoil of 2008-09), if one was a

slow and steady player who took a SIP (Systematic Investment Plan) and

exuded confidence on the long-term fundamentals of the Indian economy, one

would have been more wealthier and a happier investor.

(Source: ACE MF, PersonalFN Research)

The above chart reveals that if one were to start a SIP of Rs 5,000 a month, on March 09, 2009 for period

of 3 years (36 months) in an actively managed fund and a passive fund (index fund) respectively, your

investment of Rs 1,80,000 (Rs 5000 X 36 months) would have fetched you Rs 2,09,860 and Rs 1,93,083

respectively on SIP end date i.e. March 09, 2012. Whereas the same investment (of Rs 1,80,000) in a

lump sum form under the actively managed fund and the passive fund respectively, would have yield

you Rs 4,64,109 and Rs 3,84,680 respectively on March 09, 2012.

While one may say wheres the benefit of investing through the SIP route?, one needs to recognise

that the accentuated returns have occurred in the lump sum mode, as investments were made when

the Indian equity markets were right at the bottom of the Indian equity markets (when BSE Sensex was

at xxxx). While with SIP return on investment was lower, as units were bought in the rising markets

where the average cost of buying units amounted to be higher. But, this example cited here should not

pull you back from investing through the SIP route. And even if you try to time the market, you would be

repeating the same mistake. Sure, you may go right once, twicebut not always. You may get a kick as

well; but timing the markets may not be your cup of tea always, which in turn may land you in a soup.

Remember, when the markets turn volatile SIPs help you to even out the volatility. In fact SIPs work


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wonderfully well while the markets are on a downswing, as more units are bought at a cheaper Net

Asset Value (NAV), thus resulting in lower average cost.

Now having learnt how SIPs have been able to give better returns during the turbulence of the equity

markets, lets understand primarily what is meant by SIP, and then how it can go a long way to createwealth for you.

What is SIP?

Simply put, a SIP refers to Systematic Investment Plan which is mode of investing in mutual funds in a

systematic and regular manner. The method of investing is similar to your investment in a recurring

deposit with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but

the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or

debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to

market risk.

A SIP enforces a disciplined approach towards investing, and infuses regular saving habits which we all

probably learnt during our childhood days when we used to maintain a piggy bank. Yes, those good old

days where our parents provided us with some pocket money, which after expenditure we deposited in

our piggy banks and at the end of particular tenure we saw that every penny saved became a large

amount.

SIPs too work on the simple principle of investing regularly which enable you to build wealth over the

long-term. In case of SIPs, on a specified date which can be on a daily basis, monthly basis, or on a

quarterly basis, a fixed amount as desired by you, is debited from your bank account (either through a

ECS mandate or through post-dated cheques forwarded) and invested in the scheme as selected by you

for a specified tenure (months, years).

Today some Asset Management Companies (AMCs) / mutual fund houses also provide the ease and

convenience of transacting online. They have set up their own online transaction platforms, where onecan do SIP investments, through the IPIN (Internet Personal Identification Number) provided by the AMC

and following the procedure as made available on their websites.

So, you have fewer hassles while investing as well as tracking your investment dates.


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4 good reasons for investing regularly through SIPs

1. Light on the wallet

Instead of feeling the pinch of investing a lump sum amount at one go, SIPs enable you to invest

smaller amounts at regular intervals (daily, monthly or quarterly) thereby also attempting to infuse

regular saving habits in you.

So, if you cannot invest Rs 5,000 in one shot, thats not a

huge stumbling block, you can simply take the SIP route

and trigger the mutual fund investment with as low as Rs

250 per month. Mind you, if you want to manage the

volatility of the equity markets on daily basis you can

start daily SIP as well.

2. Makes market timing irrelevant

If market lows (as experienced during the turmoil of 2008 and early 2009), gave you the jitters and

made you feel that you had never invested in equities, then SIPs would have been of help. Timing

the markets, apart from requiring a full time attention also requires expertise in understanding

economic cycles and market scenarios, which you may or may not possess.

But, that does not necessarily make equities a loss-making investment proposition. Studies have

repeatedly highlighted the ability of equities to outperform other asset classes (debt, gold, even real

estate) over the long-term (at least 5 years) as also to effectively counter inflation.

So, now one may ask if equities are such a great thing, why are so many investors complaining. Well

its because they either got their stock or the mutual fund wrong or the timing wrong. In our opinion

both these problems can be solved through a SIP in a mutual fund with a steady track record, as the

SIP route enables you to even-out the volatility of the equity markets effectively.

3. Power of compounding

As SIPs subscribe you to the habit of investing regularly, it enables you to compound your money

invested. So, say you start a SIP of Rs 1,000, in a mutual fund scheme following prudent investment

THE FACT

The average annual per capita income of an

Indian citizen is approximately only Rs

25,000 (i.e. monthly income of Rs 2,083).

Therefore, a sum of Rs 5,000 (minimum

application amount in most mutual funds)

for a one-time entry in a mutual fund may

still appear high (2.4 times the monthly

income!).


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system and processes, with a SIP tenure of 20 years and expect a modest return of 15% p.a., your

money would grow to approximately Rs 15 lakh

Your every bit of savings makes you richer

(Source: PersonalFN Research)

4. Rupee cost averaging

In order for you to absorb the shocks of the volatile equity markets well, SIP works better as

opposed to one-time investing. This is because of rupee-cost averaging.

Under rupee-cost averaging, an investor typically buys more of a mutual fund unit when prices are

low and similarly buys fewer mutual units when prices are high. This infuses good discipline since it

forces you to commit cash at market lows, when other investors around you are wary and exiting

the market. It also enables you to lower the average cost of your investments.

Provides cushion against market volatility


So if you were to invest through the SIP route while the Sensex fell from 21,000 to 8,000 your

average cost of investments would have been very low and hence when the market rose again, your

gains would have increased substantially, and moreover you would have managed the volatility of

equity markets well.


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III - A SIP can make your dreams come true

All of us have financial goals may be buying a house, buying a

dream car, providing good education to children, getting them

(children) married well, retiring etc. But all this comes with

systematic financial planning. Very often many invest in the equity

markets, with a motive of making short-term gains, and often ignore

to use the equity markets as a window for long-term wealth creation,

in order to achieve ones financial goals. While some try to create

wealth over the long-term by investing in equities, they often time

the equity market which lands them on the wrong foot thus eroding wealth. This is because you cannot

time the markets well. Hence, adopting the SIP route and subscribing to good habit of saving and

investing regularly, as we learnt in our good childhood days where we use to maintain a piggy bank, will

work wonders for achieving financial goals.

While handling your finances it is important that you undertake your saving activity as regularly as your

income and expenses. Merely deploying your savings in IPOs, stocks, NFOs, mutual funds etc by getting

excited with what your broker / distributor or friend says, is just not the right way to go about investing

your hard earned money. Your savings have to be systematically deployed in a disciplined manner, in

various asset classes after understanding your risk appetite. This is commonly known as your asset

allocation; and your ideal asset allocation depends upon your:

Age

Your age and the tenure of your investment plays a vital

role in your asset allocation. The younger you are more

risk you can take and vice-a-versa. Similarly, if you start

early the tenure which you get while investing in an

investment avenue is greater, which enables one tomake more aggressive investments and create wealth

over the long-term to meet your financial goals.

Investing through SIP at an early age is beneficial as it

provides you the advantage of rupee cost averaging at every level, along with compounding

over the long-term.

QUICK READ

Ideal asset allocation should depend upon:

Age

Income

Expenses

Nearness to goal

Risk appetite


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Lets understand this much better with the help of an illustration.

An early bird gets a bigger pie

Particulars Vijay Ajay Sanjay

Present age

(years)

25 30 35

Retirement age

(years)

60 60 60

Investment tenure

(years)

35 30 25

Monthly investment

(Rs)

7,000 7,000 7,000

Returns per

annum

10% 10% 10%

Sum

accumulated (Rs)

2,65,76,466 1,58,23,415 92,87,834


The above table reveals that, Vijay starts at age 25, and invests Rs 7,000 per month untilretirement (age 60). His corpus at retirement is approximately Rs 2.65 crore. Ajay starts at age

30, a mere 5 years after Vijay, and invests the same amount until retirement (also at age 60). His

corpus comes up to approximately Rs 1.58 crore, note the difference between the 2 corpuses

here. And lastly, we have Sanjay, the latest bloomer of the lot. He begins investing at age 35, the

same amount monthly as Vijay and Ajay, and invests up to his retirement (also at age 60). His

corpus is, in comparison, a meagre Rs 92 lakh.


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The above illustration reveals the early bird gets the bigger worm. So, the earlier you start a SIP, themore you will benefit from the power of compounding as the tenure you have to achieve your

financial goal is longer. Moreover, longer the SIP tenure, higher would be the corpus which you will

be able to create for meeting your financial goals.

Prudence in choosing a longer SIP tenure


The diagram above reveals the value of the monthly SIP investment of Rs 1,000 if done for a longer

SIP tenure would enable you to create a substantial corpus to meet your financial goals.

So, the morale of the two illustrations presented above is:

The earlier you begin your SIPs, the better-off you are in creating a corpus for meeting your

financial goals.

Also if you choose a greater SIP tenure, higher is the corpus accumulated for meeting your

financial goals.


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Income

If your income is high, your willingness to take risk is high. This thus can work in your favour, as

you have sufficient annual income (from your work business / profession, service) which

allows you to park more money into the equity asset class, for generating higher returns andcreating a good corpus for your financial goal.

Similarly, if your income is not high enough (i.e. it is low), an equity allocation through the SIP

mode in mutual funds can still provide you, the ability to create a corpus to attain your financial

goal through power of compounding, and at the same time manage the volatility of the equity

markets through compounding.

Also depending upon your risk appetite (for low risk appetite), you can also adopt the same

strategy for Debt mutual funds, taking a view of the interest rate scenario in the country.

Expenses

In order to keep your financial health in pink in the long-term, it is important that you live within

means and curtail your unnecessary expenses. It is this strategy which will enable you save a

large portion of your monthly earnings, which can be deployed in suitable asset classes

(depending upon your age, income, risk appetite and nearness to goal) through SIP mode which

would be lighter on your wallet.

Nearness to goal

Your nearness to your financial goal is also relevant while doing financial planning. If you are

many years away from the financial goal, you should ideally allocate maximum allocation to the

equity asset class and less towards fixed income instruments. So, say you have a financial goal of

getting your daughter married well after 20 years from now, with an amount requirement of say

Rs 50 lakh, you would require to start with a monthly SIP amount of Rs 3,300 in a mutual fund

which offers you return of at least 15% p.a.


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Risk appetite

Your willingness to take risk which is a function of your age, income, expenses, nearness to goal,

will be an important determinant while framing your financial plan. So, if your willingness to

take risk is high (aggressive), you can skew your portfolio more towards the equity asset class.

Similarly, if your willingness to take risk is relatively low (conservative), your portfolio can be

skewed towards fixed income instruments, and if you are a moderate risk taker you can take a

mix of 60:40 into equity and debt respectively. While investing, practicing this exercise and

adopting the SIP mode in mutual funds, can help you to get the appropriate balance between

debt and equity in your portfolio.

To broadly understand what should be your asset allocation, you can go by the thumb rule for

asset allocation - which is 100 minus your age. So, for example if your age is 30, 70% (100 30)

of your money can be invested in equity and the rest 30% can be invested in debt instruments.

Hence by having a 70% allocation to equity you are classified as an aggressive investor, as your

willingness to take risk is more.

Asset allocation by thumb rule

(Source:PersonalFN Research)

Remember SIP helps you to systematise your savings and leads to wealth accumulation over the long-

term, which enables you to achieve your financial goals in life and live in solace.


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IV - Choosing the right mutual fund schemes for SIPs

Well, let us primarily tell you that there are no special mutual fund

schemes for SIP investing. So, selecting an appropriate mutual fund

scheme for your SIPs is very crucial.

While some may say I can simply do that going by mutual fund

ratings. But the fact is, you cant have blind faith to star ratings, as

they are often provided taking into account only few quantitative

parameters (such as returns, risk, average AUM (Assets Under

Management) etc., thereby ignoring the qualitative parameters.

Also, given the fact there are host of mutual fund schemes available in the markets, the skill of selecting

the wealth creating mutual fund schemes cannot be ignored. Hence, one must take into account the

following points while selecting mutual fund schemes.

Performance

The past performance of a fund is important in

analysing a mutual fund scheme. But just going by the

past performance would not be the right way to go

about selecting a mutual fund scheme.

It indicates the funds ability to clock returns across

market conditions. And, if the fund has a well-

established track record, the likelihood of it performing

well in the future is higher than a fund which has not

performed well.

QUICK READ

Selecting Mutual Funds:

Performance

1. Comparative study

2. Time Period

3. Returns

4. Risk

5. Risk-adjusted returns

6. Portfolio Characteristics

7. Portfolio turnover

Fund Management

Costs

1. Expense ratio

2. Exit load


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Under the performance criteria, one must take into account the following:

1. Comparison: A funds performance in isolation does not indicate anything. Hence, it is

crucial to compare the fund with its benchmark index and its peers, so as to construe a

meaningful inference. Again, one must be careful while selecting the peers for comparison. Forinstance, it doesnt make sense comparing the performance of a mid-cap fund to that of a large-

cap. Remember: Dont compare apples with oranges.

2. Time period: Its very important that you have a long-term horizon if you are looking atinvesting in equity oriented mutual funds. So, it becomes important for you to evaluate the long

term performance of the funds. However this does not imply that the short term performance

should be ignored. Besides, it is equally important to evaluate how a fund has performed over

different market cycles (especially during the downturn). During a rally it is easy for a fund todeliver above-average returns; but the true measure of its performance is when it posts higher

returns than its benchmark and peers during the downturn. Remember: Choose a fund like you

choose a spouse one that will stand by you in sickness and in health.

3. Returns: Returns are obviously one of the important parameters that one must look at while

evaluating a fund. But remember, although it is one of the most important, it is not the only

parameter. Many of us simply invest in a fund because it has given higher returns. In our opinion,

such an approach for making investments is incomplete. In addition to the returns, one should

also look at the risk parameters, which explain how much risk the fund has taken to clock the

returns.

4. Risk: The term risk simply refers to the possibility of the outcome being different than the

expected one. When the outcome is different from the one expected, it is referred to as a

deviation. Risk in a mutual fund scheme is measured through the statistical measure called

Standard Deviation (SD or STDEV) (see definition below).

It is very vital to evaluate a fund on risk parameter because it will help to check whether the

funds risk profile is in line with your risk profile or not (is it suiting your willingness to take risk).

For example, if two funds have delivered similar returns, then by sheer prudence, you should

invest in the fund which has taken less risk i.e. the fund which has a lower SD.


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5. Risk-adjusted return: This parameter measures the returns generated by the fund for the

risk taken, and is evaluated through a statistical measure called Sharpe Ratio (SR) (see

definition below). It signifies how much return a fund has delivered vis--vis the risk taken.

Higher the SR, better is the funds performance. For evaluating mutual funds, it is important to

take this parameter, because it reveals whether a fund is justifying the risk taken.

6. Portfolio Concentration: This parameter reveals the over-exposure of a mutual fund to a

particular company or a sector. By over-exposing a fund to a specific stock or a sector, the

fortune of the fund will be closely linked to the stock and / or sectoral bets taken by the fund.

Funds that have a high concentration in particular stocks or sectors tend to be very risky and

volatile. Hence, one should invest in those funds where the top 10 stocks do not exceed 50% of

the funds assets.

7. Portfolio turnover: This parameter measures the frequency with which stocks are bought

and sold. Higher the turnover rate, higher the volatility. It is noteworthy that the fund might not

be able to compensate the investors adequately for the higher risk taken. So, by judging this,

you can come to know how frequently the fund manager changes his stock bets.

You should ideally invest in a fund, with a lower portfolio turnover ratio, as this exposes you to

lower volatility.

Fund Management

This is one of the qualitative parameter, while selecting funds for wealth creation. The

performance of a mutual fund is largely linked to the fund manager and his team. Hes the guy

whos managing your money invested in mutual funds, so knowing his experience in fund

management will be valuable. Its imperative that the team managing your fund should have

considerable experience in the field of fund management and equity research, in order to deal

with market ups and downs. You should not go by star fund manager. Simply because the fund

manager who is employed with an AMC today, might quit tomorrow; and hence the fund will be

unable to deliver its star performance without its star fund manager. Hence, your focus

should be on the fund houses that are strong in their systems and processes.


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Remember: Fund houses should be process-driven andnot starfund-manager driven.

1. No. of schemes to fund manager ratio: Many mutual fund houses frequently launch too

many similar products, so that they could gather more Assets Under Management

(AUM). This eventually leads to the fund manger being over-burdened in managing

these multiple mutual fund schemes, which can result in lower efficiency of the fund

manager on focusing on the need of his investors.

Hence, it becomes imperative to select a mutual fund house where, the fund manager is

not over-burdened; otherwise this might just take a toll on the funds performance.

Costs

If two funds are similar in most contexts, it might not be worth buying the high cost fund if it is

only marginally better than the other. The two main costs incurred are:

1. Expense Ratio: Annual expenses involved in running the mutual fund include

administrative costs, management salary, overheads etc. Expense Ratio is the percentage of

assets that go towards these expenses. Every time the fund manager churns his portfolio, he

pays a brokerage fee, which is ultimately borne by you as investors in the form of an

Expense Ratio. Hence, a higher churning not only leads to higher risk, but also higher cost to

the investor.

2. Exit Load: Well, thats the price which you pay while exiting from your funds, within a

particular tenure; most funds charge if the units are sold within a year from date of

purchase. As exit load is a fraction of the NAV, it eats into your investment value. Hence,

one should invest in a fund with a low expense ratio and stay invested in it for a longer

duration.

And which option - Growth option or Dividendoption is the right one?

Well, to go for a growth option or a dividend option is completely need based, depending upon what

your financial plan calls for.


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REGULATORY FACTS

The capital market regulator SEBI

(Securities and Exchange Board of India)

banned entry load from August 1, 2009

thereby destroying the commission

oriented model followed by mutual fund

advisors, and persuaded them to follow

the fee based model (investors pay a

advisory fee to mutual fund advisor) of

doing business. This was done with the

intention making advisors more

accountable and responsible for what

they are advising to investors. SEBIs

objective was to do away with the earlier

model, where mutual fund schemes were

sold on an ad-hoc basis by advisors, in

order to earn more commissions from

Asset Management Companies (AMCs).

If you are in need of regular tax free cash flows (in the form of dividend) or want to book profits at

regular intervals, then you should be going for the dividend option. There are two variants to the

dividend option which are:

Dividend Payout Option: Under this option, regular cash flows will be paid to you in the form

of dividends (either through cheques or ECS (Electronic Clearing Service) credit), which in a

way will enable you to liquidate profits.

Dividend Re-investment option: Under this option instead of receiving dividend cheques,

the dividend amount declared by your mutual fund scheme, will go in buying additional

units of the same scheme (where you are invested), and youll continue to book profits and

keep re-investing them in the same scheme.

In case of growth option, you would not stand to receive any dividends; instead continue to enjoy

compounded growth in value of your mutual fund scheme, subject to the investment bets taken by

the fund manager.

Now among the factors listed above (for selecting

mutual fund schemes), while few can be easily gauged

by you, there are others where information is not

widely available in public domain. This makes analysis

of a fund difficult for you and this is where the

importance of a mutual fund advisor comes into play.

Today, there are several mutual fund research houses

too which are engaged in the business of providing

mutual fund research services at a fee. But, it is

noteworthy that selecting the right mutual fund

research house is very vital to create wealth over the

long-term. A mutual fund research house which

provides absolutely independent and unbiased mutual

fund research services taking into account quantitative

as well as qualitative parameters can only do wonders

to your investment portfolio.


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Going one step forward, if one wants the right mutual fund schemes which are well researched in an

unbiased way, you may also select to do a SIP in a Fund of Fund (equity FoF) scheme. Under the FoF

scheme, your money is invested by the fund manager in various funds, thus facilitating you to

diversify across mutual funds and fund management styles there under. You have an option of

investing in equity FoF, hybrid FoF (having a mix of both equity and debt mutual funds) and / or debt

FoF. It offers you the following advantages:

Risk: The risk associated with such funds is theoretically much lower, than conventional mutual

fund schemes (which invest your money in stocks). However, while investing in such schemes

one should study whether the FoF scheme, is investing in the AMCs own funds/schemes or also

invests in mutual fund schemes, from other AMCs as well. This check can be performed by

studying the investment mandate of the FoF scheme, and it is important to study this, as ideallythere should not be much concentration towards schemes from the same AMC.

Cost: Your cost of investing can significantly come down. Instead of investing say Rs 2,000 each

in 5 schemes i.e. Rs 10,000 totally; you can invest the desired amount in one scheme. FoF

provides you an opportunity to be invested in all the schemes at a fraction of the original cost.

Convenience: Yes, this is another area where FoF scores high. You are spared the bother of

tracking the performances of various schemes. Also you don't have to churn your portfolio.

Moreover, if the equity markets hit a rough patch while the debt markets start looking up, you

won't have to reduce the holding in equity funds and invest in debt schemes; the fund manager

from his FoF will do the needful. Also the fact that your portfolio is not tampered implies that

the incidence of tax (capital gains) is also avoided. At present FoF are categorised under debt

schemes for the purpose of taxation and hence taxed accordingly (20% on long-term capital

gains with indexation benefit or 10% without indexation benefit).

But, given the advantages of FoF too, it is noteworthy that while selecting the right FoF scheme your

advisor / mutual fund distributor or the mutual fund research house can be of great help in

providing the right advice.


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V - Debunking some common myths about SIP investing

Incorrect information sometime shared by your friends and broker,

often blinds our ability to understand things in the right perspective.

Very often investors live under some delusion, as their thoughts areinfluenced by the incorrect information their friends and brokers

share.

Some of the myths which investors have about SIP investing are:

1. Only Small investors go in for SIP

Please note that SIP stands for Systematic Investment Plan (SIP) and not Small Investors Plan.Hence, it is incorrect to be under the illusion and arrogance that SIP, is meant only for small

investors.

Remember those good old days, where our parents subscribed us to a good, regular saving habit by

buying us a piggy bank, where we all saved some money every day or week or month to build a

corpus at the end of a particular period. But the fact was the regular deposits in your piggy bank, did

not earn a rate of return. In case of SIPs (Systematic Investment plans) too, if you go by the same

logic of the piggy bank, you would realise that your money saved in a systematic manner may be

daily, monthly, quarterly, for a said tenure (period of SIP) will help you to build a corpus earning a

rate of return, in order to attain your financial goal.

2. Rupee cost averaging can be done in a stock itself then why SIP?

Its noteworthy that, certainly you can bet on equity, but diversification through mutual funds would

help you to reduce the stock specific risk which you are exposed in direct equity (stocks). Moreover,

as per the market cap bias (i.e. large cap, mid cap and small cap) which a fund follows, you can also

strategically structure your portfolio depending upon your risk appetite. Similarly, you can structure

your portfolio on the basis of the style (viz. value, growth, blend, opportunities, flexi-cap, multi-cap

etc) of investing followed by the mutual fund. And by adopting the SIP mode of investing for mutual

funds, youll benefit from rupee cost averaging and compounding.


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Remember a SIP experimented on single scrip, can expose you to more volatility unlike SIP in mutual

funds which reduces the risk, due to diversification provided by mutual funds.

3. SIP mutual funds are different from lump sum mutual funds

Well many have this illusion. The fact is, there are no special schemes for SIP investments. SIPs are

just a mode of investing. You can enrol for a SIP in any mutual fund scheme, but ideally you should

select a mutual fund taking into account the qualitative parameters such as investment processes

and system, fund managers experience, uniqueness of the products etc., along with quantitative

parameters such as returns, risk, average AUM (Assets Under Management), liquidity, expense ratio,

portfolio characteristics etc.

Remember, theres more than justa return while selecting a mutual fund scheme for your portfolio.

4. Lump sum investments cannot be done in a scheme, where a SIP account exists

It is noteworthy that SIP, is just a mode of investing in mutual funds. Hence, pumping a lump sum

amount to a mutual fund where your SIP exists is possible. So, say you have a SIP of Rs 1,000 going

on in a mutual fund scheme and suddenly you have a surplus of say Rs 50,000, then you can pump a

lump sum amount to your ongoing Rs 1,000 SIP account.

5. Ill be penalised if I miss one or two SIP dates

As seen earlier, while enrolling for the SIP mode of investing you are required to provide your ECS

mandate form along with the common application form. Your SIP details (as selected) are already

mentioned in the ECS mandate, thus your bank at regular SIP dates keeps debiting the SIP amount in

favour of the fund where you have opted a SIP. Hence, the question of missing dates doesnt arise.

Now for some reason if you are not maintaining a balance in your bank account for your SIP to be

debited, you would simply miss that SIP instalment, but your SIP account will remain active and

further SIPs (subject to your bank balance) will be debited to your bank account. So, its not like the

EMI (Equated Monthly Instalment) of your loan, where you miss an instalment; you are penalised.

Remember, SIP infuses discipline in investing and is entirely at your free will.

6. Ill accumulate through SIP and liquidate through SWP during retirement.

Well, if you adopt this financial planning strategy, you are bound to face nightmares during your

retirement. It is noteworthy that, as you approach retirement your appetite for risk reduces, as your


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number of years of earning life decreases. Hence having savings lying in equity mutual funds during

retirement years can be risky. In order to maintain a lifestyle post-retirement, you should transfer

your savings to low risky asset classes such as debt and cash from a high risk asset class like equity.

Remember to adopt the right strategy while planning your finances think wise!

7. Markets are too high to start a SIP

Well, if thats what you think, then you should be starting a SIP immediately. Thats because as the

market corrects you would by accumulating more number of units, with every fall in the NAV, thus

enabling you to lower you average purchase cost. And, as the markets, post the correction surge

once again, you would gain as the yield will work to be higher.

Remember by adopting the SIP route for mutual fund investments, you are shielding your portfolio

against the wild swings of the markets. Dont unnecessarily try to time the markets as it is not

always possible.

8. In a tax saver SIP entire money can be withdrawn after 3 years

In case of a SIP in tax saving mutual funds (commonly known as Equity linked Saving Schemes

ELSS), very often a delusion exists that, the entire investment in a tax saving mutual fund can be

withdrawn once the lock-in period is over. But thats not the case!

The fact is: your every instalment of SIP should have completed the lock-in tenure. So if you put in

Rs 5,000 through SIP in the month of October 2011, the lock-in period for only 1 instalment (i.e.

October 2011) will get over on October 2014. While other SIP instalments need to complete 3 years

as well.


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VI - Your take-home points

Now that we have debunked some common SIP myths, and obtained

knowledge about the advantage of SIP investing, one must take note

of the following thumb rules:

Save regularly

Stick to your asset allocation and invest regularly

Create a corpus (by investing regularly) for fulfilling your

dreams

Dont time the markets, instead take a SIP

Do enough research before, investing in a mutual fund

scheme

Select a dividend or growth option as per your needs

Do not stop a SIP, in between as by doing so you may not be

able to make regular investment and enjoy the power of

compounding

How should I register for a SIP?

You can either opt for the traditional off-line mode for investing, where you approach your mutual

advisor / distributor who assist you in doing the following:

Select a mutual fund scheme

Fill in completely the original copy of the initial application form mentioning the name of the

scheme

Fill in completely an ECS mandate form by mentioning (or post-dated cheques) the SIP amount,

SIP date and SIP tenure

Hand over the forms (as mentioned above) to the Registrar and Transfer Agents (RTAs) / AMC.

Alternatively, you can also register for the online transaction platform(s) as provided by the AMC(s)

where one can do SIP investments, through the IPIN (Internet Personal Identification Number) provided

by the AMC and follow the procedure as made available on their websites. Generally the procedure

followed for online SIP registration is:


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Fill in an online registration form (which will eventually generate a folio number)

Select the folio number in which you wish to invest systematically

Enter the IPIN (as provided by the AMC)

Select the scheme where you wish to invest

Fill in an online form mentioning the SIP date, SIP amount and SIP tenure and register

A transaction Identification number will be generated (which should be noted by you)

Selecting your bank from the list of banks, where you will be re-directed to your banks website

whereby you can add your AMC / mutual fund house to the list of billers using the transacting

Identification number generated above.


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VII - Annexure

SIP Returns by popular mutual fund schemes

Scheme Name1-Yr SIP Return

(% CAGR)2-Yr SIP Return



(% CAGR)

Quantum LT Equity (G) 11.51 5.90 15.28 15.64

Franklin India Bluechip (G) 6.95 3.52 11.01 11.64

Sundaram Select Midcap (G) 0.81 -0.81 10.75 11.89

Fidelity Equity (G) 2.79 0.99 10.35 11.04

HDFC Top 200 (G) 4.78 1.42 10.21 12.65

DSPBR Top 100 Equity-Reg (G) 9.71 4.45 9.99 10.97

ING Midcap (G) 6.27 0.84 9.63 7.60

UTI Mastershare (G) 1.31 0.21 7.14 7.95

Birla SL Frontline Equity-A (G) 0.95 -1.37 6.86 9.39

Reliance Equity Adv-Ret (G) 4.65 0.41 6.41 -

Kotak Opportunities (G) 2.88 -1.56 6.34 7.25

IDFC Imperial Equity-A (G) 0.22 -1.76 4.49 7.20

SBI BlueChip (G) 4.51 -1.55 4.39 5.24

Baroda Pioneer Growth (G) -2.79 -5.89 1.53 5.78

Average 3.90 0.34 8.17 9.56

(Source: ACE MF, Personal FN Research)

Performance as on March 09, 2012

Note: PersonalFN does not recommend that the reader transact in any mutual funds without doing the

necessary research. The aforementioned table does not represent the recommendation ofPersonalFN.

Readers are requested to consult their advisors / financial planners before investing.

The table above explains the CAGR (Compounded Average Growth Rate) generated by SIPs in

various kind of mutual funds, under the respective time frames.


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DEFINITIONS

Mutual Fund

A mutual fund is an investment avenue that enables a collective group of individuals to:

i. Pool their surplus funds and collectively invest in instruments / assets for a common investment

objective.

ii. Optimize the knowledge and expertise of a fund manager, a capacity that individually they may

not have

iii. Benefit from the economies of scale which size enables and is not available on an individual

basis.

Equity mutual funds

These funds invest in equity shares. These funds may invest money in growth stocks, momentum

stocks, value stocks or income stocks depending on the investment objective of the fund.

Debt funds mutual funds

These funds invest money in bonds and money market instruments. These funds may invest into

long-term and/or short-term maturity instruments.

Active mutual funds

These funds are actively managed by the fund manager, where he effectively picks up stocks with

the intention to beating the returns of the benchmark chosen to track the mutual funds

performance. In the process of achieving this objective the fund manger may take stock specific bets

and adopt fund management style as he deems fit.

Passive mutual funds

These funds try to mimic the returns of the benchmark index, wherein the fund manager replicates

the stocks of the benchmark index and maintains same weights as those followed in the benchmark

index.

Net Asset Value (NAV)

NAV is the sum total of all the assets of the mutual fund (at market price) less the liabilities (fund

manager fees, audit fees, registration fees among others); divide this by the number of units and


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you arrive at the NAV per unit of the mutual fund. Simply put, this is the price at which you can buy /

sell units of a mutual fund scheme.

Standard Deviation (SD or STDEV)

SD is the measure of risk taken by, or volatility borne by, the mutual fund scheme. Mathematically

speaking, SD tells us how much the values have deviated from the mean (average) of the values. SD

measures by how much the investor could diverge from the average return either upwards or

downwards. It highlights the element of risk associated with the fund. The SD is calculated as under

by using average returns of the scheme i.e. Net Asset Value (NAV).

Where:

STDEV = Standard Deviation

SQRT = Square Root

Returns = Point to point rolling returns on absolute basis (which can be daily, weekly, monthly,

quarterly, annual)

Average returns = Mean of all point to point rolling returns on absolute basis

Sum = Addition or summation

N = Number of occurrences

Sharpe Ratio (SR)

SR is a measure developed to calculate risk-adjusted returns. It measures how much return you can

expect over and above a certain risk-free rate (for example, the bank deposit rate), for every unit of

risk (i.e. Standard Deviation) of the scheme. Statistically, the Sharpe Ratio is the difference between

the annualised return (Ri) and the risk-free return (Rf) divided by the Standard Deviation (SD) during

the specified period. Sharpe Ratio = (Ri-Rf)/SD. Higher the magnitude of the Sharpe Ratio, higher is

the performance rating of the scheme.

STDEV = SQRT [(Sum ((Returns Average Returns) ^ 2)) / (N 1)]


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Compounded Annual Growth Rate (CAGR)

It means the year-over-year growth rate of an investment over a specified period of time.

Mathematically it is calculated as under:

Absolute Returns

These are the simple returns, i.e. the returns that an asset achieves, from the day of its purchase to

the day of its sale, regardless of how much time has elapsed in between. This measure looks at the

appreciation or depreciation that an asset - usually a stock or a mutual fund - achieves over the

given period of time. Mathematically it is calculated as under:

Ending Value Beginning Value x 100

Beginning Value

Generally returns for a period less than 1 year are expressed in an absolute form.

General Disclaimer: This communication is for general information purposes only and should not be construed as a

prospectus, offer document, offer or solicitation for an investment or investment advice.


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