What is Systematic investment plan (SIP) – HDFC Securities

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  • RETAIL RESEARCH

    May 14, 2015

    RETAIL RESEARCH

    SIP - Special

    Systematic Investment Plan (SIP)

    What is a SIP? Systematic investment plan (SIP) is a disciplined way of investing in mutual funds which enables the investors making regular and equal payments at regular intervals for periods to accumulate wealth over long run. An SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

    The important strategy behind to get better returns by investing via SIP in an equity scheme is to keep on investing regardless

    of the market conditions. Investors have to keep SIP running for a longer period and do not stop during downturns.

    In this note, we explain following aspects pertaining to the investments through SIP;

    1. Benefit of investing through SIP over long term,

    2. Why one should not discontinue the SIP during downturns,

    3. Are equity markets too high? Is it right time to start an SIP? (OR) High Market times are also right time to start an SIP.

    4. All time winner SIP in Hybrid Equity Mutual Funds.

    1. Investing via SIP over long term is advisable Why?

    i. To achieve long term goals: Long-term wealth creation through equity market requires disciplined approach and long term

    time horizon which are inherent features of SIP. Ideally speaking, SIP is a perfect tool for people who have a specific, future

    financial requirement. By investing an amount of your choice every month, you can plan for and meet the long term financial

    goals, like funds for a childs education, a marriage in the family or a comfortable post-retirement life. Secondly, staying

    invested over longer term in the equities helps to handle the fluctuation or volatility in the value of the stocks.

    ii. Little Drops of Water Make the Mighty Ocean: Even investing a smaller amount in the equity market regularly over long

    period can end up with a large corpus in the investors hand.

    The chart below illustrates how a little every month can go a long way. The chart shows the Rs. 1,000 of investment every month for the last ten years through SIP route in ICICI Pru Value Discovery Fund. The amount invested so far was Rs. 1.2 lakh and the current value of the investment is at Rs. 4.4 lakh.

    http://hdfcsec.com/Product-Services/Mutual-Fund/201602101022596955958http://www.hdfcsec.com/Equity-sip/201107140950207305273

  • RETAIL RESEARCH

    iii. Investing through SIP for longer time frame achieved better results compared to short term periods: The below chart shows the growth of investments which were made in Sensex in various time frames through SIP mode. No doubt, investing through SIP for longer time frame achieved better results compared to short term periods.

    Benefits of staying invested long term:

    iv. The longer the time-frame, the larger are the benefits of averaging: Equity markets are volatile and move in a cycle. They go

    up, peak, go down and then bottom. When one cycle is finished, the next begins. SIPs make the market volatility and cycles

    work in favour of an investor and help in averaging out the cost. The concept is commonly referred to as rupee cost

    averaging. More units are purchased when a schemes NAV is low (during market low) and fewer units when the NAV is high

    (during market up). Hence, when the two cases are taken together, the cost is averaged out. The longer the time frame, the

    larger are the benefits of averaging.

    The below table also describes the benefit of investing through SIP over long run.

    Benchmark XIRR Returns (%)

    1 Yr SIP 5 Yrs SIP 10 Yrs SIP 15 Yrs SIP

    CNX Nifty Index 4.24 13.59 11.74 15.02

    S&P BSE Sensex 2.29 13.25 11.51 15.37

    2. Dont discontinue SIP during market corrections:

    Many investors make the mistake of discontinuing their SIP investments when market falls. This exit could impact the portfolio

    returns significantly as it fails to get the opportunity to average costs. As discussed above, more units can be purchased when

    a schemes NAV is low (during market low) and fewer units can be bought when the NAV is high (during market up), hence the

    investor can achieve averaging the cost out.

    Investments through an SIP can ensure steady returns. Ideally speaking, it is difficult to time the market. Whereas, with an SIP,

    investors can ride safely during market downturns and manage better returns if they stay invested through an entire market

    cycle.

    We have conducted a study to justify the fact that the investor who stops the SIP during the market bottom tend to lose out

    and end up with lower returns as compared to the SIP that are redeemed in the next peak of the bottom.

    http://hdfcsec.com/Product-Services/Equity-IPO/201008230400510625000

  • RETAIL RESEARCH

    We have chosen 5 different periods wherein the domestic equity market witnessed their bottoms (from the Sensex

    movement) in the last 10 years period. Also, the peaks successive to these bottoms are considered for the study. We have

    calculated the SIP returns for the different time frames from the Sensex (assuming investing in Sensex through SIP) that all

    were redeemed during the bottoms and their successive peaks. The comparison results shows that the SIPs that were

    redeemed during market bottoms showed lower and poor returns than the SIPs that were redeemed in the next peak of the

    respective bottoms. Interestingly, in most of the scenarios that chosen, the time gap between the bottom and its successive

    peaks are at 6 months to one year.

    The below tables illustrate the SIP returns (XIRR) (%) with different time frames done in the Sensex. In scenario I, we have

    considered the period 14 June 2006 as bottom and 20 Feb 2007 as the successive peak. We have assumed those two dates as

    redemption dates and calculated SIP returns for one, three, five, seven, ten, twelve and fifteen years for both periods. The

    results clearly show that the SIPs that were redeemed during bottom ended with lower returns compared with that of the SIPs

    which were redeemed in the successive peak. That means, the SIPs that were redeemed on 14 June 2006 posted lower returns

    compared to the SIPs that were redeemed on 20 Feb 2007. We can see the same results in the remaining scenarios as well.

    To conclude, SIP investors need not to worry about the fluctuations or ups and down that are seen in the equity market. You

    could grab better returns in the next 6 to 12 months period if you stay invested during market falls.

    Scenario I:

    Redemption details XIRR Returns (%)

    Redemption during market Redemption date Sensex value 1 Yr SIP 3 Yrs SIP 5 Yrs SIP 7 Yrs SIP 10 Yrs SIP 12 Yrs SIP 15 Yrs SIP

    Bottom 14-Jun-06 8,929 -3.84 26.21 28.39 19.78 14.96 12.68 11.31

    Next Peak 20-Feb-07 14,253 45.40 47.56 42.33 31.72 22.55 19.20 15.82

    How to read the table: The figure -3.84 shown in the second row and fourth column is the XIRR returns (%) from the one year SIP that was redeemed on

    14th Jun 2006. Since it was a one year SIP, the first installment was made on 1st July 2005 with Rs. 1,000 each for the 12 months.

    The chart below also explains the same.

  • RETAIL RESEARCH

    We can see the same trend in the following scenarios as well.

    Scenario II:

    Redemption details XIRR Returns (%)

    Redemption during market Redemption date Sensex value 1 Yr SIP 3 Yrs SIP 5 Yrs SIP 7 Yrs SIP 10 Yrs SIP 12 Yrs SIP 15 Yrs SIP

    Bottom 9-Mar-09 8,160 -58.38 -29.97 -6.00 6.52 7.80 7.84 7.21

    Next Peak 12-Jun-09 15,238 93.25 10.13 17.68 23.01 19.26 17.22 14.54

    Scenario III:

    Redemption details XIRR Returns (%)

    Redemption during market Redemption date Sensex value 1 Yr SIP 3 Yrs SIP 5 Yrs SIP 7 Yrs SIP 10 Yrs SIP 12 Yrs SIP 15 Yrs SIP

    Bottom 25-May-10 16,022 -5.35 8.79 10.46 16.79 18.89 16.87 14.50

    Next Peak 5-Nov-10 21,005 31.13 24.48 16.07 19.85 22.11 19.30 16.62

    Scenario IV:

    Redemption details XIRR Returns (%)

    Redemption during market Redemption date Sensex value 1 Yr SIP 3 Yrs SIP 5 Yrs SIP 7 Yrs SIP 10 Yrs SIP 12 Yrs SIP 15 Yrs SIP

    Bottom 1-Jun-12 15,965 -13.52 -5.95 0.99 4.30 12.67 13.48 12.37

    Next Peak 13-Feb-13 19,608 19.85 5.95 9.19 7.67 13.50 15.48 14.05

    Scenario V:

    Redemption details XIRR Returns (%)

    Redemption during market Redemption date Sensex value 1 Yr SIP 3 Yrs SIP 5 Yrs SIP 7 Yrs SIP 10 Yrs SIP 12 Yrs SIP 15 Yrs SIP

    Bottom 27-Aug-13 17,968 -12.60 -0.91 4.92 3.90 9.28 13.01 12.48

    Next Peak 23-Sep-14 26,776 38.09 23.29 14.59 13.38 13.23 15.91 15.79

    3. Are the equity markets at highs? Is it right time to start an SIP?

    The below table portrays the 3 Years SIP returns (XIRR) (%) of the different equity oriented categories that were started in the

    different periods of market cycles seen in the last 8 years periods (redeemed after respective 3 years) . From the table one

    can understand that the SIP that was started during market peak (on 01-Jan-2008) posted better or similar returns to that of

    the SIP investment made on 01-Jan-2012. The 01-Jan-2008 was the period wherein the domestic equity market saw its peak

    (Sensex value crossed 20,000 mark). Since, it is a 3 years SIP, it was redeemed on 31-Dec-2010 (wherein the Sensex touched

    again the 20,000 mark after a significant correction).

    On the other hand, the SIP investment that was started on 01-Jan-2012, posted better returns as it is redeemed during rising

    marke

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