what is a systematic investment plan

8/7/2019 What is a Systematic Investment Plan

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What is a Systematic Investment Plan (SIP)?

SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is very similar

to regular saving schemes like a recurring deposit.

An SIP allows you to buy units on a given date each month, so that you can

implement an investment / saving plan for yourself. Once you have decided on the

amount you want to invest every month and the mutual fund scheme in which you

want to invest, you can either give post-dated cheques or ECS instruction, and the

investment will be made regularly. SIPs generally start at minimum amounts of Rs

1,000 per month and the upper limit for using an ECS is Rs 25000 per instruction.

Therefore, if you wish to invest Rs 100,000 per month, you may need to do it on 4

different dates.

As is customary, I started with describing the concept of an SIP. Let us break some

myths on SIP now.

Investment in equity mutual funds or unit linked insurance should always be done in

SIP mode: I remember in 1999 when Templeton Mutual fund would talk about SIP x

the market looked at it skeptically. And it took a lot of convincing for customers to

accept it. Now, life has come a full circle. Everybody wants to (always) invest using an

SIP. If you have the maturity and calmness to realize that equities are for the long

term and are willing to give your funds about 10 years, and you have a lump sum, you

can afford to give the SIP route a pass. However, if your horizon is less than five

years, you must do an SIP.

I do rupee cost averaging in a single equity x that is a kind of SIP is it not? This is a

question I face every day. No, a rupee cost averaging in a single scrip cannot be

equated to an SIP. When the market brings down the price of a single scrip, it is

giving you information. You need to react to that.

Let us take 2 examples x Lupin Laboratories x has moved from a high of Rs 700 to

Rs 100 and back to Rs 700. The question to ask here is not whether an SIP would


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have worked. The question to ask is whether you would have had the stomach to

continue the SIP through this period. Silverline Technologies moved from Rs 30 to

Rs 1300 to Rs 14! In this case, if you had started an SIP at a price of Rs 1300, today

you would be licking your wounds. SIP works in a portfolio, not in a single scrip.

You cannot invest a lump sum in the same account in which you are doing an

SIP: Many people assume that if they are doing an SIP in a particular fund, and

suddenly they have a surplus, they cannot put that lump sum in that account. Fact is,

in case you are doing an SIP of Rs 10,000 per month in an equity fund, and suddenly

you have a surplus of Rs 100,000 and clearly you have a 10-year view on the same,

then you can just push it into your SIP account. SIP is just a payment mode, not a

scheme!

If I miss investing for a particular month, will they prosecute me? Now, this is the fear

of EMI that people have. In an SIP you are buying an investment every month (or

quarter), there is no question of prosecuting you for missing one investment. As a

matter of discipline, you should not miss any month; however, missing one monthts

investment is not a crime!

When you have a surplus (accumulation stage of your life) you should do an SIP and

during retirement you should do a Systematic Withdrawal Plan (SWP): No. You should

ideally keep your withdrawals only from an income fund or a bank fixed deposit. You

should sell an equity fund on some other basis, say deciding to sell 20% of your

portfolio in a year so that the return is 4 times the 30 year historic return. SWP, by

definition cannot work in an equity fund!

SIP works for everybody, but does not work for me: Another myth. SIP works in a well-

diversified equity fund in the long run. When people put forth arguments that it does

not work for them, they have either not chosen a good fund or are looking at a 12

month horizon.

SIP is only for small investors: Nothing can be farther from the truth. I have a client

who has invested Rs 32.66 lakhs using SIP, starting from January 1998 till date.


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Obviously, he has invested much more in later years as his income went up and the

funds together are worth Rs 97 lakhs, substantially higher than his provident fund.

Market is at very high level to start an SIP: I have heard this when the index was

3000 also. I have no clue where the market is headed, but I know SIP works!

All fund houses are now charging a full load on the SIP, so now SIP will not work Why

not time the market? Introducing an entry load was expected to happen and it has

happened. What actually hurts the retail investor is the asset management charges x

2.5% in most cases is a bigger threat to compounding! (Also read -How to optimize

your tax using mutual funds?)

If I do an SIP in a ta plan, can I withdraw all the money on completion of 3 years?

Another regular question almost! Every installment has to be with the fund house for 3

years. The lock-in comes from the Income tax rules, which say that a tax saving

scheme should have a 3-year lock-in. You cannot escape that by doing an SIP!

EXPERTS OPINION

How to play your cards right in the stock market

It is the very characteristic of the securities markets to swing from one end to the

other depending on the popular mood and in such times, those who can separate

reason from emotion can spot opportunities.

As Sir John Templeton puts it, uTo buy when others are despondently selling and sell

when others are avidly buying requires the greatest fortitude and pays the greatest

potential reward.v

But how does one act contrarian? There is an adage in the stock markets, uDo not

catch a falling knife.v

Well, there is an answer in one of the proven portfolio investment strategies - Asset

Allocation. What is asset allocation? How does it work? How does it help an investor

invest contrary to the market?


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Asset allocation is the scientific process of dividing all your money across various non-

correlated asset classes. In simple terms, if your money is allocated between stocks

(equity shares or growth mutual funds), bonds (debentures, government securities,

long term fixed deposits or income funds) and cash (savings bank account, short term

bank deposits of money market mutual funds), you have taken the first step. One may

consider various other investment options like property or gold, but we will restrict our

discussion only to the financial assets, which are stocks, debentures and cash.

The second step is to know how much money should be allocated in which of the

options. Now this is a function of two things, the investment options have certain traits

or characteristics and the investor has certain financial goals as well as certain risk

appetite. This risk appetite is again a function of onets needs as well as psychological

ability to handle the unexpected. The science of asset allocation tries to build a

portfolio that matches the traits of the assets with the needs of the investor.

There are various approaches adopted by different advisors to build portfolios for their

clients largely keeping the clientst needs in mind. We will not get into the discussion of

the same here since the solutions would be different for different investors since their

needs would be different from one another.

Let us come back to the discussion of what asset allocation can do and how it can

help investors. We will try to keep it very simple only for the purpose of understanding.

The actual portfolios or the practical approach cannot be so simple.

Let us assume that after assessing the needs of one of the clients, the advisor

recommends investment of 50% of the assets in an equity mutual fund and 50% in a

money market mutual fund. The investor and the advisor then decide to review the

performance of the portfolio every six months. The review process is also very simple.

The objective would be to maintain the allocation between equity fund and money

market fund at 50:50.

Given that the stock prices are volatile over shorter terms and move in line with the

profits of the company over longer periods, we are likely to see the value of the equity


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mutual fund go up and down over time. When that happens, the asset allocation

would stray from the 50:50 that was set originally.

When the equity prices move up faster than the debt prices, the allocation will get

skewed in favour of equity and our review process would restore it back to 50:50 by

shifting some money from equity fund to debt fund. In the other case, when the equity

prices move adversely, the balance would get skewed towards debt and the balance

can be restored by shifting from debt fund to equity funds. What you are doing here is

selling equity when the prices run up and buying when the units got cheaper. One is

able to do this without having to worry about analyzing what is happening in the

market place.

The above example is applicable to an investor, who has a static

portfolio without any additions into the portfolio or withdrawals from the

same. In reality, the investor may get inflows, which need to be invested

in the portfolio or have a need to take some money out of the

investments. In such cases, at the time of investment or redemption, the investor has

to look at the current market value of the equity fund and debt fund and rebalance the

portfolio to 50:50.

Automatically, the money goes into equity fund when the stock prices are low and into

debt fund when the stock prices are high.

The only problem with the above is that what looks so simple is very difficult to

execute since the approach means ignoring all the sound bytes taking place around

you. It takes a lot of courage to chart onets own course and more importantly, to

continue walking that path x at times, all alone.

-Amit Trivedi

How to become a better MF Investor?

Every new MF investor faces a dilemma whether he should begin

investing with a balanced fund or an equity fund to build wealth over


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time. Volatility in the stock market every now and then adds to the confusion. Another

dilemma faced by investors is whether one should invest through Systematic

Investment Plan (SIP) or make a lump sum investment.

For investors, who do not have a lump sum but intend to build up a capital over the

longer term, investing regularly through a Systematic Investment Plan (SIP) is an ideal

strategy. It is a proven fact that a steady plan both in terms of savings and

investments helps pursue financial goals. It also takes care of the issue of handling

volatilities in the market. In fact, investments are made at different levels of the market

and that results in ensuring the average purchase price being lower than the average

NAV. However, for those who have a lump sum to invest, a combination of one time

investment and SIP can get the best results.

Balanced fund or Equity fund?

As regards the choice between a balanced and an equity fund for a regular long-term

investor, the key point to be considered is that a balanced fund invests around 30-

35% in debt instruments. It is a common knowledge that debt instruments generally

find it difficult to beat inflation on a consistent basis. Therefore, investing in them may

not be a prudent choice especially when one invests to achieve long-term objectives.

Though equity funds are riskier than balanced funds, the risk gets minimized for an

investor who invests for the long-term in a disciplined manner. Besides, equities have

the potential to out perform all other asset class in the long run.

Should I sign up SIP for 10 years or one year at a time?

For a regular long-term investor, another tough decision to make is

whether to sign up SIP for a longer period or for one year at a time.

Though signing up SIP for 10 years may be a convenient option, it may

not always be a wise one. Though there is no hard and fast rule

regarding the tenure for which one can sign up for SIP at a time, it would be sensible

to review the performance of the schemes every year and take a call on whether to

continue in those schemes or change a scheme or two. Besides, one might like to


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increase the amount every year. In that case, one can do so conveniently without

having to add new schemes every time one decides to increase the amount for SIP.

How to handle the urge to abandon equity funds every time the market turns volatile?

If working out the right strategy to invest is a tough job, certain situations during the

tenure of the investments can make the task even tougher. One such situation is

when the market turns volatile or starts falling sharply. Whenever the stock market

turns volatile, many investors start questioning their strategy of investing in equity

funds. In fact, many of them start seriously considering moving money to the safety of

debt funds completely ignoring the principle of investing to beat inflation.

It is true that during volatile periods, short-term performance of equity funds takes a

beating. However, short-term performance does not take away the ability of equities to

out-perform other asset classes over the longer term. Therefore, the right way to

handle short-term volatility is to ignore it and keep focus on long-term objectives.

Many investors also get perplexed to see the NAVs of some of the funds falling more

than Sensex orNifty during the turbulent times. There are certain reasons that make

many funds under-perform whenever the market falls sharply.

Firstly, most diversified funds have varying degree of exposure to mid-

cap and small cap stocks. Since these two segments of the stock market

are generally the worst hit during periods of high volatility, the

performance of diversified funds is impacted adversely. Secondly, like

any industry, mutual fund industry also has players whose performances vary from

upoorv to uoutstandingv.

As regards realigning the portfolio, short-term trends in the equity market should not

compel investors to make changes in the asset allocation made to achieve long-term

investment objectives. As happens with equity funds, even debt-oriented funds get

affected by changes in the interest rates. Therefore, we may see a different picture

with regard to the returns offered by debt-oriented funds from time to time.

Are FMPs a good option when the stock markets turn volatile?


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Though as an option, FMPs (Fixed Maturity Plan) offer a decent combination of safety

and returns, including them in the portfolio at the cost of equity funds may not be a

wise thing to do for the long-term health of a portfolio. However, FMPs can definitely

play an important role in improving returns on that part of your portfolio, which you

may have allocated to debt and debt related instruments.

Opt for smart Ta Saving options

Every tax payer knows that he would be paying a certain amount of tax during the

year. However, despite knowing it, not many plan for it. No wonder, there is invariably

a scramble to make last minute tax savings investments rather than following a

disciplined approach of investing throughout the year. As we have entered into the last

quarter of the current financial year, many tax payers would be making tax savings

investment during this period. Tax payers would do well to be careful while deciding

where to invest or else they could end up taking impulsive decisions.

There are many investment options under section 80C of the Income tax Act, 1961

that enable tax payers to reduce their taxable income upto a maximum of Rs 1 lakh.

Some of the prominent options are contributions to Employees Provident Fund (EPF),

Public Provident Fund (PPF), National Savings Certificate (NSC), and Bank Fixed

Deposit for tenure of 5 years, Equity Linked Savings Schemes (ELSS), Life Insurance

Premium and Principal component of the EMI for housing loan. Besides, an additional

Rs 20,000 investment in Infrastructure bonds is allowed as deduction under section

80CCF.

Before deciding on how much to invest in different options, one must consider

compulsory savings like EPF and prior commitment towards LIC premiums. Another

important point to know is that each one of the tax savings options has a mandatory

lock-in. However, the period varies from option to option. For taxpayers who do not

mind conservative returns to ensure safety of the principal amount, investment in PPF,


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Bank FDs, NSCs can be the likely options. Amongst all these safer options, PPF

scores over others as one that not only earns a fixed return of 8% but also one is not

liable to pay any tax on it. However, there are limitations too. Firstly, it has a maturity

period of 15 years. Secondly, there is a cap on the maximum amount that one can

invest in it i.e. Rs 70,000 every year.

However, for those who would like to get positive real rate of returns i.e. return minus

inflation over time and wouldntt mind taking commensurate risk to achieve this, ELSS

can an ideal investment option. ELSS is the best example of an investment option that

provides a very simple way of investing in the stock market and save taxes while

doing so. Under ELSS, one can invest up to Rs 1 lakh and save taxes.

As a product category, it has given decent returns over the years. While, the past

performance alone should not be the sole criteria for making an investment, the fact

remains that over a period of time equities have the potential to provide better returns

compared to other instruments. Needless to say, being equity oriented funds; these

schemes carry all the risks that are associated with an equity investment. However, a

three years lock-in period ensures that one of the major risks i.e. volatility over the

short term, is handled efficiently.

Another notable feature is the tax efficiency in terms of returns earned through them.

It is important considering that ELSS also aims to distribute income by way of dividend

periodically depending on the distributable surplus. As per the current tax laws, an

equity fund investor is not only entitled to earn tax free dividend but also the long-term

capital gains are not taxable. ELSS is governed by the guidelines issued by the

government. These guidelines have specified the minimum amount to be Rs 500 and

thereafter in multiples of Rs 500.

As regards the investment pattern, these schemes have to invest at least 80% of the

corpus in equity and equity related instruments. However, each of the fund houses


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launching ELSS can decide its own investment strategy. Therefore, the portfolio

composition becomes a major deciding factor while selecting a tax savings scheme.

Simply put, it is crucial to have a closer look at the schemets

exposure to different segments of the market i.e. large, mid and small

cap before investing in it. Though, the past performance cannot be

ignored, it is equally important to analyze the risk taken by the fund

manager in achieving those returns. If the portfolio composition and the investment

philosophy of the fund take you beyond your acceptable risk taking capacity, you

would be better off investing in ELSS that has a well balanced portfolio and has a

consistent performance track record.

The table below highlights the portfolio composition as well as the performance track

record of some of the prominent ELSS.

Scheme

Name

Market

Capitalization -

% of portfolio

Performance as on Jan 7,

2011

Launch LargeMid Small1-

Year*

2-

Year**

3-

Year**

5-

Year**

Franklin

India

Index Tax

Feb-01 99.38 0.62 y 11.84 40.83 -2.4 14.63

Birla Sun

Life Tax

Relief '96

Mar-96 62.04 24.35 13.61 8.2 49.48 -7.24 15.29

HDFCTaxsaver

Mar-96 60.02 33 6.96 20.39 55.94 4.77 16.5

Kotak Tax

SaverOct-05 59.69 21.85 16.02 12.05 42.37 -7.58 12.05

Fidelity Jan-06 76.83 14.38 7.42 23.69 53.18 4.83 --


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Many investors make the mistake of not including tax savings investments as a part of

their overall investment process. As a result, they end up investing in a haphazard

manner and that reflects in the performance of the portfolio. Hence, one needs to

strategize onets tax saving investments and rely on smart options like ELSS to get the

best results.

Unfortunately, with the implementation of new Direct Tax Code from April 1, 2012, the

ELSS will cease to exist. It would be a pity as ELSS has emerged as a great option

for the first time investors to learn the ropes of equity investing. So make the most of

it while it is there.

-Hemant Rustagi

Start planning early for your retirement

Retirement planning is a process of establishing retirement goals and

working out allocation of finances to achieve these goals. This

process, if properly followed, can go a long way in ensuring the right

level of preparedness required for a dream retired life.

Tax

Advantage

Canara

Robeco

Tax Saver

Mar-93 67.25 20.9 11.85 19.4 51.56 5.87 21.08

Sundaram

BNP

Paribas

Taxsaver

Nov-99 63.62 26.3 8.47 5.67 38.08 -1.44 16.29

*absolute**annualised


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While it is a well known fact that we need to save to build a retirement nest egg, many

of us fail to do so. No wonder, we often get overwhelmed by the thought of retirement

and end up wondering how we will ever generate the huge amount of money required

to lead a happy retired life.

Many of us face this dilemma because we consider retirement planning as a single

event rather than considering it as a life long process. If we save and invest regularly

over the years, even a small sum of money can suffice for this purpose. The key,

however, is to start investing early as the real power of compounding comes with time.

Unfortunately, few young people look that far ahead.

Another challenging aspect of retirement planning is to calculate how much we will

need to support ourselves and our dependants. As a thumb rule, one requires around

75- 80% of onets current income to maintain the similar standard of living. Of course,

this amount will increase with inflation. Though it is a proven fact that starting early is

an important aspect of retirement planning, it is extremely difficult to decide how much

one will need after retirement. A professional advisor can make things easy and hence

it is always prudent to go for professional advice to ensure success in the process of

retirement planning.

One can also enhance the chances of success by making retirement planning an

integral part of overall investment planning. Hence, it is crucial to examine onets

current situation and the attitude towards risk. Remember, investing without a clear

picture can be too risky. The key to success is to adopt a disciplined savings

programme as well as have the flexibility of multi-stage approach to investing.

The road to success for this all important and a long-term goal can at times be

bumpy. Therefore, having patience and discipline can go a long way in achieving the

desired results. While it is impossible to anticipate every obstacle, knowing some of

the common mistakes can help in avoiding them. The important ones are not having a

plan as well as a backup plan in place, making frequent changes in the portfolio and

investing too conservatively.


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Investing to beat inflation is an important aspect of retirement planning. To understand

as to how inflation can impact our future requirements, let us take an example of

someone who is 30 years away from retirement. If we assume a 5% inflation rate, the

Rs. 100,000 annual expenditure will increase to over Rs. 435,000 by the time he

retires. Therefore, if he plans for Rs. 100,000 per annum for his retirement, he would

be having less than 25% of what he would really require.

Therefore, a retirement plan and the strategy to implement it should cover the

following:

w Begin investing early

w Invest to beat inflation

w Invest regularly

w Know your risk tolerance

w Evaluate your insurance and investment needs

w Follow a ubuy and holdv strategy

w Invest in tax efficient instruments like mutual funds.

Investing regularly is another key ingredient of retirement planning. Broadly speaking,

we need to save a certain percentage of our annual income and invest in instruments

that have the potential to give the desired results over different time horizons. The

following can act as a guideline:

Ages: 25 to 40- Depending on the age, 15 to 25% of the annual income should be

saved. The portfolio should be dominated by equities and/or equity funds. These

should comprise 70 to 80 percent of the investments. To balance out the portfolio, one

could rely on stable yet tax efficient investments such as PF, PPF and debt and debt-

oriented mutual funds.

Ages 41 to 50- In this age group, one should save around 25 to 35% of the annual

income. As the time horizon to retirement is still long enough, equity and/or equity

funds should continue to be a crucial part of the portfolio i.e. around 60% or more.


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The balance can be invested in PF, PPF and other debt and debt related mutual

funds.

Ages 51 to 60- At this stage of onets life, the time horizon for retirement starts

shrinking. Therefore, the prudent thing to do would be to follow a slightly conservative

approach. However, it is important to remember that it may only be a few years before

one retires, but one may need to depend on retirement funds for many more years.

Therefore, the key is to maintain a portfolio that will continue to grow for many years

after one retires. Equity and/or equity funds should still be a part of the portfolio,

though in a moderate percentage.

If you haventt started planning for your retirement yet, you need to do it now.

Remember, for every 10 years of delay in the process, you will need to save three

times as much each month to catch up for the lost time.

-Hemant Rustagi..

Three mantras to help you pick the best funds

A month ago, Mr Patankar (a cautious investor by habit) decided to invest Rs 3 lakh

in a 'good' mutual fund.

He looked up the performance rankings of various funds, to try and zero in on the

best fund. But a month later he is still confused, because there was no consistency or

consensus amongst rating agencies.

Different financial web sites, magazines and newspapers came up with different

conclusions as to the top rated funds.


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This is because, the rating methodology adopted differs from agency to agency.

In a bid to prove that they are special and more incisive than the next

agency, they adopt all kinds of techniques and statistical tools to come up with

dissimilar results.

Why rankings differ?

y Most agencies adopt risk adjusted ratings, however, the definition of risk differsfrom agency to agency.

y Some adopt the Sharpe ratio, some use the Sortino ratio and yet others look atstandard deviation and beta.

y Then there are others who choose particular parameters like size of assets,portfolio turnover, tenure of the fund manager with the fund, fund size,

expense ratio then proceed to assign weights to each of these parameters to

arrive at a composite ranking.

y Others declare that they use a proprietary system which remains unknown tothe public at large.

So, how do you pick the best fund?

Here are three simple steps to sort out the good from the bad.

1. View rankings with a pinch of salt

Most of these arcane rating methodologies are solutions in search of problems.

Dontt ignore them totally, however, when you go through them, keep your pinch of salt

ready.

2. Ignore new funds on the block

If a mutual fund has been around for less than a year, ingnore it! Essentially - ignore

one month, three month or six month returns and rankings. I will go to the extent of


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saying -- only look at those funds that have existed for over three years. Not only will

you eliminate a whole lot of sme toot upstarts, but it will also give you an idea about

the sustainability of the returns of the fund.

3. Scout for common funds amongst various rankings

Now that you have significantly reduced the sample size, try and find the common

funds that come up in the top ten lists of the various agencies. In other words, arrive

at the lowest common denominator.

Quick tips...

It is important that you invest in a well-managed fund, however, whether it is the top

performing one or the second or the fifth, matters little.

Secondly, a topper today may come in fourth next year and so on. As long as you

have invested in a quality portfolio that has stood the test of time, the particular

ranking from any particular agency should matter little.

Just like Tendulkar having a lean patch doesntt make him a lesser batsman, dontt get

swayed by a three or six month performance number.

A good mutual fund stands the test of time, and this is the only true test.

what is a systematic investment plan

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