Systematic Investment Plan (SIPs)

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 I dont have enough money to invest

Im too busy making money to worry about managing it.

I dont have the time or expertise to follow market movements and make investments at the right time
SIP is an investment program that allows you to contribute a fixed amount (as low as Rs. 1000/-) in mutual funds at regular intervals.

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You must have heard this statement more than n times now that

SIP is the best investment style So lets understand why SIP has emerged as the most powerful style of investing in recent times through
Some real life examples.

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There are basically three points that makes SIP such a strong concept Rupee Cost Averaging

Power of Compounding
Market timing irrelevance
Let us simplify these terms in next few slides

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Rupee Cost Averaging

To understand this concept more practically look at the illustration below. The SIP investor finishes with an investment that is worth more than the lump sum investor after six months - even though the starting price and finishing price are exactly the same. Unlikely but it is true. Check the figures yourself .This is the first thing what SIP does; it averages the buying cost automatically.
THE POWER OF RUPEE COST AVERAGING
Lum-Sum Investor Month 1 2 3 4 5 6 Average price paid Total units bought Value of investment after six months Unit Price 20 18 14 22 26 20 Amount Invested 60000 -----Rs 60000 20 3000 Rs 60000 Units Bought 3000 -----Regular Investor Amount Invested 10000 10000 10000 10000 10000 10000 Rs 60000 19 3109 Rs 62018 Units Bought 500 556 714 455 385 500

Total Amount Invested

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Power of Compounding
This mathematical formula of compounding : FV = PV (1 + r) is known to all of us but is seldom understood in terms of investing. Lets use an i.e.: If you invested Rs. 100000 PV (Present Value) in a instrument that grows @ 15% per year (the r) for a period of 25 years (the n), its FV (Future Value) will become Rs.3291895. Unbelievingly the amount multiplied to a whopping 33 times Now the lets see how the same compounding plays in a SIP over a period of time. The table below justifies all statements of the Power of Compounding. A meager amount of Rs. 1000 per month over 25 years at an annualized growth rate of 15% accumulates to a humongous number of approx Rs. 33 lakhs

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Market timing is irrelevant

Let s look at the above analysis in the next slide whether it actually happens

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Time in the market matters VS not timing

Data Source : Bloomberg

*CAGR (Compound Annual Growth Rate) -The year-over-year growth rate of an investment over a specified period of time RR Investors Retail Services (P) Ltd. www.rrfinance.com

Now that we have seen the Power of SIP; lets try to address this point

When SIP works best for us

Few slides from hereon will explain this more clearly.

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SIP will work best if following acts are done:

Start Early Invest Regularly

Invest for Long Term

Invest in the Right Asset Class

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Invest Regularly

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Invest for Long Term

Data Source : Bloomberg

Hence longer your SIP Period

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Lower the risk

Greater the effect of compounding More predictable average returns

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Invest in the Right Asset Class

Undoubtedly Equity is the winner overtime

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Now that we have seen why and how SIP can best work - a question still remains unanswered .

Can SIP help individuals like you and me in real life situation to meet our financial goals ?
Lets try to answer this question through a simple case study and see whether benefits of SIP really work

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Case Study Real Life Situation

Assume You are 30 yrs of age; have a wife and kid Current Annual expenditure of Rs. 5,00,000 Retirement expected at age 60 yrs More Average prices (i.e. inflation) will rise by 7% pa After 30 yrs when you retire, the low risk rate of return will be 6% pa (Considering you put all your accumulated corpus post retirement in a bank deposit) You will live for more 20 years post retirement
So lets see what will be the corpus required at the time of your retirement to maintain the same current lifestyle additionally with enhanced medical expenses

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Current Expenditure Rs.5,00,000 p.a. Inflated at 7% p.a. for 30 years Expenditure at the time of Retirement Rs. 36,00,000 p.a.

Therefore to generate this income every year post retirement you need to accumulate a corpus

Income to be generated post Retirement Rs. 36,00,000 p.a. Corpus Required at the time of Retirement Your first reaction Impossible! It cannot be achieved. But then there is a solution
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So what s the Solution Just one simple thing Subscribe for an SIP of Rs.15,000 per month in a good diversified equity fund for 30 years and forget it
You still dont believe it that it can be that simple; let us validate our conviction with actual returns generated in a equity fund over the years
SIP Investments
Total Amount Invested @ Rs.15000 per month ( Rs.) Market Value as on July 29, 2011 (Rs.) Returns (Annualized)*(%) Benchmark Returns (Annualized)(%)# Market Value of SIP in Benchmark#

Equity Fund 15 year SIP

2,700,000 34,379,093 29.87% 15.87% 9,967,057

10 year SIP
1,800,000 8,682,024 29.64% 18.42% 4,737,423

5 year SIP
900,000 1,427,405 18.56% 8.36% 1,110,339

3 year SIP
540,000 798,522 27.29% 14.08% 664,982

From the table it is crystal clear that if an investor did an SIP of Rs.15000 per month in Equity Fund for 15 years, he would have invested 27 lacs and that would have grown to a whopping number of 3.4 crore as on date; in spite of so many pitfalls in equity markets in last 15 years.

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Still need to think; No pressure but see this what the delay can cost in the same case study
Time to Retirement (yrs) Investment Required Monthly Annual 30 Today 15,000 1,80,000 25
After 5 years from now

15
After 15 years from now

10
After 20 years from now

21,000 2,32,000

48,000 5,76,000

80,000 9,60,000

Current Age : 30 years Retirement Age : 60 years Retirement Corpus to be accumulated : 8 cr. Assumed Rate of Return on Investment : 15% p.a.

With every passing year the time to retirement is reducing and increasing the burden of investment required. Now the choice is our whether we want

TO START NOW OR STILL WAIT..

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