Systematic Investment Plan

PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE & ECONOMICS
Systematic Investment Plan

A rupee a day, keeps worries away...
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SYSTEMATIC INVESTMENT PLAN
Chapter No. 1 Introduction to Investment
In India savings rate was underestimated for long time and when it was
corrected, the planners realized that Indian when it was corrected, the planners
realized that Indian economy generated impressive rate of savings. The ratio of
economy generated impressive rate of savings. However, investment, that is
capital formation, was not however, investment, that is capital formation, was
not adequate to achieve higher growth rate of GDP. This was adequate to
achieve higher growth rate of GDP. This was mainly because of low efficiency
in the use of capital. In other mainly because of low efficiency in the use of
capital. In other words, the amount of capital required to produce one unit of
words, the amount of capital required to produce one unit of output or GDP is
called capital-output ratio. Output or GDP is called capital-output ratio.
Inefficiency of Inefficiency of capital use indicates high capital output ratio.
Capital use indicates high capital output ratio. In other words, in order to
achieve high growth rate of output or In other words, in order to achieve high
growth rate of output or GDP, we need to mobilize higher savings and use
lower GDP, we need to mobilize higher savings and use lower amount of
capital.
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Chapter No. 2 Types of Investments
1. Bonds:
Grouped under the general category called 'fixed-income' securities, the

term 'bond' is commonly used to refer to any founded on debt. When you
purchase a bond, you are lending out your money to a company or
government. In return, they agree to give you interest on your money and
eventually pay you back the amount you lent out.
The main attraction of bonds is their relative safety. If you are buying
bonds from a stable government, your investment is virtually guaranteed
(or "risk-free" in investing parlance). The safety and stability, however,
come at a cost. Because there is little risk, there is little potential return.
As a result, the rate of return on bonds is generally lower than other
securities.
2. Stocks:
When you purchase stocks (or 'equities' as your advisor might put it), you
become a part owner of the business. This entitles you to vote at the
shareholder's meeting and allows you to receive any profits that the
company allocates to its owners–these profits are referred to as dividends.
While bonds provide a steady stream of income, stocks are volatile. That
is, they fluctuate in value on a daily basis. When you buy a stock, you
aren't guaranteed anything. Many stocks don't even pay dividends,
making you any money only by increasing in value and going up in
price–which might not happen.
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3. Mutual Funds:
A mutual fund is a collection of stocks and bonds. When you buy a

mutual fund, you are pooling your money with a number of other
investors, which in turn enables you (as part of a group) to pay a
professional manager to select specific securities for you. Mutual funds
are all set up with a specific strategy in mind, and their distinct focus can
be nearly anything: large stocks, small stocks, bonds from governments,
bonds from companies, stocks and bonds, stocks in certain industries,
stocks in certain countries, and the list goes on.
The primary advantage of a mutual fund is that you can invest your
money without needing the time or the experience in choosing
investments. To know more about mutual funds, please visit our learning
centre.
4. Alternative Investments: Options, Futures, FOREX, Gold,

Real Estate, Etc.:
So, you now know about the two basic securities: equity and debt, better
known as stocks and bonds. While many (if not most) investments fall
into one of these two categories, there are numerous alternative vehicles,
which represent more complicated types of securities and investing
strategies.
The good news is you probably don't need to worry about alternative
investments at the start of your investing career. They are generally high-
risk/high-reward securities that are much more speculative than plain old
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stocks and bonds. Yes, there is the opportunity for big profits, but they
require some specialized knowledge. So if you don't know what you are
doing, you could get yourself into a lot of trouble. We would therefore
suggest that you start with simpler investment avenues and leave these
investment vehicles for the experts.
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Chapter No. 3 Examples of Investment
1. Government Securities (Bonds):
Bonds issued by Central or State government. These bonds are termed as

the safest investment instruments in India. Example of these bonds are
“Dated government security” which are issued for a period of 10 years
with a fixed coupon payment.
These securities carry least amount of credit risk as they are backed by
the Government of India.
2. Equity:
Investing in direct equity. One can start investing in Indian equities by
participating in primary markets (applying for IPO’s) and also by
purchasing securities from secondary markets (stock exchanges).
Investing in direct equity is termed risky and one needs to diversify the
risk by investing in multiple securities from various sectors. Example:
investing in real estate stocks, pharma stocks, PSU stocks and Oil stocks
all at once.
Equities carry the maximum risk and (may) also provide you with
maximum returns.
Investors can also participate in equities by investing in mutual funds.
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3. Mutual Funds:
Mutual fund is a financial instrument created with pool of investments
from many investors. Mutual funds are professionally managed and they
invest in equity, debt, gold, foreign equity, etc. on your behalf.
Mutual funds are one of the best way to diversify your portfolio.
SIP’s are a form of Mutual fund where one tends to invest systematically
i.e. once a month or once in three months, etc. [I will come up with a
detailed post on mutual funds soon.]
Some of The Terms Used In Mutual Funds
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided
by the number of units outstanding on the Valuation Date.
Sale Price:- It is the price you pay when you invest in a scheme and is
also called "Offer Price". It may include a sales load.
Repurchase Price: - It is the price at which a Mutual Funds repurchases

its units and it may include a back-end load. This is also called Bid Price.
Redemption Price: It is the price at which open-ended schemes

repurchase their units and close-ended schemes redeem their units on
maturity. Such prices are NAV related.
Sales Load / Front End Load: It is a charge collected by a scheme

when it sells the units. Also called, ‘Front-end’ load. Schemes which do
not charge a load at the time of entry are called ‘No Load’ schemes.
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4. Debentures/ Bonds:
Corporate’s need money and they don’t go to banks every time to fulfill
their needs, they have two options to raise money – come up with an IPO
or issue bond with fixed term to maturity and fixed coupon payments.
They function just like the government bonds and the only difference is
that they are a bit riskier compared to government bonds.
Returns offered by these bonds are higher compared to government

bonds.
5. Real Estate:
In India investing in real estate is considered as the best form of
investment but only after gold. Historically real estate has performed well
in India.
Investing in metros has become very expensive so it is advisable to invest

in outskirts. For example Vashi, Vasai, Bhiwandi around Mumbai.
6. Gold:
The only form of investment which most of our mothers and fathers
would believe in. Gold is considered as the best investment in India, that
is the only reason why India is the highest consumer of gold in the world.
Most of the people in India buy physical gold. ETF’s, Mutual funds, etc.
are yet to pick up as an investment avenues in India.
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7. Bank fixed deposits:

This considered as one of the traditional ways of Investing. Most of the
people in India with a bank account will have at least one fixed deposit.
FD’s offer a fixed return at the end of specified period.
Currently bank FD’s offer somewhere around 8% to 9% returns annually.
8. Corporate Fixed Deposits:

They are just like bank FD’s they only difference is that they are issued
by corporations. They are a bit riskier compared to bank FD’s as most of
these corporate deposits are unsecured an hence offer higher interest rate.
They offer interest rates as high as 12% to 13% p.a.
An example of this would be – FD by Mahindra Finance, Shriram

Transport Finance, etc.
9. Post office savings schemes:

These saving schemes by post offices are trusted by many Indians. The
scheme attracts decent returns. One can start investing with as low as Rs
100 per month.
10.National Pension Scheme:

The National Pension System (NPS) is a defined contribution based
pension system launched by Government of India. This instrument is
used for retirement planning by many.
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11.Commodity:
This is one of the latest passion for investors, trading in MCX to offset
the risk of their equity portfolio. Many headers and arbitrageurs use this
financial instrument.
Retail investors can invest in commodity with the help of commodity

mutual funds in India.
12.Investing in Art:
Art as a form of investment is quite common in developed nations and the
trend is picking up in India. Many affluent Indians buy art preserve it and
diversify their portfolios.
13.Venture Capital/ Angle Investing:

Investing in someone’s business idea at an early stage of the venture. You
get equity for the amount invested and one can exit the investment when
the business is acquired by some other company or when the company
gets listed. These investments are highly il-liquid and carry huge risk.
It is not advisable for a retail investor to invest in these kind of

instruments.
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Chapter No. 4 Introduction to SIP
A Systematic Investment Plans (SIP) is good tool that retail investors can utilize
to optimize their investment strategy. SIP is nothing but a simple method of
investing a fixed sum of money in a specific investment scheme, on a regular
basis, for a pre-determined period of time. A recurring deposit with the post
office or a recurring deposit with a bank is also a SIP. SIP Systematic
Investment Plan was already famous and proven in Mutual Fund context but
now SIP has also come directly into Equity Stocks which is essentially
Individual Stocks. Equity SIP is a new facility through which you can buy script
for a regular interval over a period of time for specified amount or for a
specified quantity. Investing in mutual funds is not everybody’s cup of tea.
Being dependent on factors such as a fluctuating stock market and risking your
hard earned money for a measly profit does not really help. If you are a
disciplined investor however, and are interested in mutual funds, then the
Equity Systematic Investment Plan (SIP) would work well for you.
SIP requires you to invest a particular amount in a specific mutual fund scheme.
In comparison, it functions much like a recurring deposit. You can plan a
savings scheme for yourself and commit a particular sum of money each month
on a pre – fixed date to the scheme. You can begin with as low as Rs. 500 in
ELSS (Equity Linked Saving Schemes) scheme and move on to Rs. 1000 a
month for other diversified schemes. SIP follows a simple mantra – buy when
high and sell when low. This is simple way to win in the stock markets.
However, the market needs to be timed well and this will take some time to
figure out for the novice or busy player. That’s where SIP with its monthly pay
scheme comes into the picture. Putting in a sum of money each month will
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ensure that you have something in when the market is high, and when it is low
securing your position in an unstable market.
Systematic investment plan is a vehicle offered by mutual funds to help you

save regularly. It is just like a recurring deposit with the post
office or bank where you put in a small amount every month. The difference
here is that the amount is invested in a mutual fund. The minimum amount to be
invested can be as small as Rs 100 and the frequency of investment is usually
monthly or quarterly.
Systematic investment plan is a scheme which allows investors to invest in a

mutual fund a certain amount of money over a period. For example, investors
can invest Rs 5000 in a mutual fund every month.
We all have various financial obligations. Some of them like daily needs, school
fees, etc involve the major outgo of your cash. Others like trip for your family
or buying a fancy gizmo entails a onetime payments for which money can be
relatively easily collected. But for long term goals like retirement or purchasing
a home require you to save and invest for many years. Yet irrespective of the
amount involved and the time horizon, planning and investing money
systematically and regularly enables you to sail through these obligations. A SIP
could prove to be a simple and effective solution toward achieving these goals.
A SIP is a method of investing in mutual funds, by investing a fixed sum at a

regular frequency, to buy units of a mutual fund schemes. It is quite similar to a
recurring deposit of a bank or post office. For the convenience, an investor
could start a SIP with as low as Rs 500; however this amount may differ from
one fund house to other.
Systematic investment plan offers periodical investment option, which is

especially designed for those investors, who do not want to invest their money
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lump sum in fact it is for those who want to invest their money in mutual funds
but in periodic intervals. It works similar to the process of deposit money every
month in a bank but difference is that of course it is an investment in mutual
funds.
The prime goal of this investment plan is to help investors to identify their
investment objectives and help them out to achieve these goals by giving them
systematic investment mechanism of equity related mutual funds. These mutual
funds provides steady investment plan but all the value depends on the portfolio
of the mutual fund. Many analysts think that systematic investment plan and
monthly income plan is somewhat the same thing with different names. The
difference is systematic investments plan is managed by a group of investment
professionals, who have expertise in risk assessment and reduction, portfolio
management and diversification, minimize trading cost, flexibility of liquidity,
and access to corporate information. Simply it is a most simple, time oriented
formula crafted to help investors for accumulating money over longer course of
time. It is considered to be a most effective strategy to invest money in volatile
markets. . This opportunity allows investors to buy shares on regular schedule.
Mostly this is done through account deduction. It has the ability to handle the
volatility of the market in disciplined way. It is the best technique to mitigate
the risk of investor’s pool money. This is the best way for individuals to earn
returns on safe investment through systematic investment plans. This is the best
way to get a start to your investment and enter into a mutual fund. It is a long
term investment plan in which you can’t withdraw your money immediately, it
takes at least two to three years, when you can withdraw your money. Despite
all this, systematic investment plan is the safest option for investment in mutual
funds.
Remember systematic investment plan is the plan which helps you to achieve
your investment goals rather a tool which improves your returns.
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What is Systematic Investment Plan?
A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help

investors save regularly. It is just like a recurring deposit with the post office or
bank where you put in a small amount every month. The difference here is that
the amount is invested in a mutual fund.
SIP mainly helps us to get addicted to an investment principle –
Income – Savings = Expenditure, instead of following the principle of –
Income – Expenditure = Savings.
SIP can be used in any type of mutual fund, equity or fixed income. This
strategy is best used in an equity find where an investor can capture the
volatility in the equity markets to reduce the cost of investment. The NAV of
any fund is determined by the market price of the stocks the fund has invested
in. When an investor invests a fixed sum every month or quarter he gets more
units of the fund when the markets are down and NAV is low than when the
markets are up and the NAV is high. By investing across time horizons and
market cycles, investors stand a better chance of lowering their investment cost.
To know about systematic investment plan, it is important to know about

investment.
INVESTMENT is putting money into something with the expectation of gain

that upon thorough analysis has a high degree of security for the principal
amount, as well as security of return, within an expected period of time. In
contrast putting money into something with an expectation of gain without
thorough analysis, without security of principal, without security of return is
speculation or gambling. In finance, investment is the commitment of funds
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through collateralized lending, or making a deposit into a secured institution.

Investments are often made indirectly through intermediaries, such
as banks, Credit Unions, Brokers, Lenders, and insurance companies. Though
their legal and procedural details differ, an intermediary generally makes an
investment using money from many individuals, each of whom receives a claim
on the intermediary.
In simple words we can say investment is the process of using your money to
try and make more money by committing it to some specific endeavor.
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Chapter No. 5 Features of SIP
1. Affordable to small investors

It is affordable to pay a small amount regularly than paying a large
amount as a whole. Moreover, many Asset Management Companies
(from whom you purchase Mutual Funds shares) charge very less to no
entry loads for SIP when compared to other one time investments.
2. Low market risk through Rupee Cost Averaging

This is the best feature in this policy. Success in stock markets depends
on pure timing. Highest profits can be gained when you invest in the right
stocks at the right time i.e. when the markets are on high. The problem
here is we can’t foresee this timing every time. (If you know when to
invest and where to invest then what is the big deal? You can win jackpot
every day!) This problem is eliminated through Rupee Cost Averaging.
To understand this lets take an example.
You started investing Rs. 1000 for 3 months. In the first month, the
markets are on a high, then price per share (NAV) will be high (say Rs.
25). So you get less shares, in this case, 1000/25 = 40.
In the second month, markets went down, then price per share dips (say
Rs. 20). So you get more shares, here 1000/20 = 50
In the third month, lets say NAV is Rs. 10. Then you get 1000/10 = 100
shares. So on an average, you paid Rs. 18.3 per share (25+20+10/3).
Since you are buying small amounts continuously, your investment will
average out over a period of time. So the risk will be less no matter how
the stock markets are.
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3. Compounding effect
It means the early you invest the better you gain. Let’s say you planned
for SIP for 10 years investing Rs. 1000 monthly. You stopped after 10
years. Then you friend invested the same amount for 20 years. But due to
compound effect, at the end of 20 years, you will get higher outcome than
your friend.
4. Easy liquidity
You can have the liberty to exit at any time even before the agreed time
period. But some exit load shall be charged.
5. Mode of payment
There are two options here
1. Through Electronic Clearance Service (ECS): Here the mutual
fund will debit certain amount from your account as per your
instructions.
2. Postdate cheques: You can also give postdated cheques. Since they
are dated ahead, they can only be cashed on the given date. Note
that all the mutual fund scheme do not offer SIP. Liquid funds,
cash funds and floating rate debt funds belong to this category. All
types of equity funds, debt funds and balanced funds offer SIP.
Systematic Investment Plan is very useful for beginners as it is risk
free and independent of markets. You also get better returns by
investing regular fixed investments.
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Chapter No. 6 Advantages of SIP
Investing is the process of making your money work for you, instead of simply
sitting safely in the back, and it is increasingly a necessity of modern life. It is
frequently no longer possible for an individual to work in one job all their life
and retire on their pension. People move from job to job, or from career to
career, and due to government cutbacks the responsibility for providing for their
retirement falls increasingly on the individual. By investing your money wisely
you can make a profit that you can then re-invest or put aside as a nest-egg. A
good return on an investment can maximize earning potential.
The reason that mutual funds are so popular is that they offer the ability to
easily invest in increasingly more complicated financial markets. A large part of
the success of mutual funds is also the advantages they offer in terms of
diversification, professional management and liquidity.
1. Price averaging: SIP allows you to average the price over long period so
that the impact of changing prices of mutual fund is minimized. You can
buy more units when the prices drop and buy less when the prices move
up. The advantage is that you do not have to worry about price
movement.
2. Discipline: SIP instills in you a sense of discipline towards investment
and savings.
3. Low base requirement: You can start SIP with a much lower
investment. Many banks and financial institutions allow investment via
SIP as low as Rs 500 a month.
4. More convenient for average person on wallet: It’s easier for a person
to invest in small amount every month, rather than a lump sum amount.
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Investing through SIP is lighter on wallet. It’s easy to pay Rs 5,000 per
month for 1 year, rather than investing 60,000 at a same time.
5. It brings your average cost price for unit down (in volatile market)
:The biggest advantage of SIP is this part , There is a concept of rupee-
cost averaging, In SIP you buy less when market and NAV are UP and
you get more units when they are low. When this happen, the average
cost of per unit is lower.
6. Makes you a disciplined Investor: The other advantage of SIP is that it
makes you a disciplined investor. Once you start SIP, each month you
have to contribute certain money in mutual fund and that habit is
cultivated.
7. Rupee cost averaging: SIPs are based on the concept of Rupee cost
averaging. It helps investors to limit their purchases in rising markets and
expand them in falling markets. It helps to tap the tops and bottoms of a
stock market thus averaging out the cost per unit of a mutual fund scheme
(see example given above).
8. Disciplined Saving: SIPs play a vital role in helping us improve our
investment habits. It reminds investors of their commitment to contribute
a specified amount to the pool at regular intervals. This makes investors
more disciplined in their approach towards investment which finally
helps them in saving more money (as this monthly investment could
otherwise be used for spending on unnecessary items).
9. Compounding Benefits: Because of the power of compounding,
investors who start early get the maximum advantage. SIPs have provided
maximum returns when investments are made for a long period of time
(i.e. for 3 to 5 years) and investors who follow this strategy gain from the
compounding effect of returns on their investments.
10. Risk-free from Timing: Many investors try to time the market and fail
most of the time for the simple reason that it is virtually not possible for
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anybody to time the market. SIPs enable investors to capitalize on upside

and downside movements in the market and be care-free from the tedious
task of timing the market. Investors opting for SIPs don't need to worry
about the daily movements in the market.
Advantages of SIP
1. SIP offers you tax benefits which could come in handy if have to pay
income tax.
2. Regular Investment makes you disciplined in your savings and also leads
to wealth accumulation.
3. SIP comes with a locking period, so even if you wish to spend you cannot
as the funds are locked and cannot be taken out.
4. In SIP, invest as low as 500 or 1000 rupees. There is no need to worry if
you do not earn a lot of money as you can still be a market investor with
as low as 500 a month and even that would come up to be quite a good
sum after a few years.
5. In SIP, you invest in mutual funds where your investments are managed
by market experts and professionals who have good knowledge in this
field, so you have a chance to do much better than that of investing
yourself alone.
6. In SIP, you will be purchasing units at all phases of the market, high or
low, depending on that you get the units share and so you don’t need to
worry about market going up or down. But just have to wait for the right
time to take out your money after the scheme is over and no more
deposits are being done. Thus your investments get averages out at the
end and the loss is very limited which isn’t the case when you invest all at
once.
7. Convenience and affordability because of an easy payment method.
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8. Helps X to develop the habit of disciplined investing as he/she is

compelled to fulfill his/her commitment of making a fixed payment every
month.
9. Rupee cost average benefit - By investing through the SIP route, 'X'
receives 194.925 units at an average cost of Rs. 61.5621. However, had
'X' invested the whole of Rs. 12000 at one go, he would have received a
different number of units. Suppose 'X' had invested Rs. 12000 on:
1st Jan 2006 - He would have received 259.24 units
1st Jul 2006 - He would have received 193.11 units
1st Dec 2006 - He would have received 133.45 units
Since, it is not so simple for anybody to perfectly time the market, it
makes a more sensible approach to invest through SIP option (for long-
term, say 3 to 5 years). It actually makes the volatility in the stock
markets work for investors. This example helps us to understand how SIP
allows 'X' to take benefit of all the highs and lows of the market during
this twelve months’ time period.
10. Flexibility to redeem units at any time or making a change in the monthly
investment amount.
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Chapter No. 7 Disadvantages of SIP
The major disadvantage of investing is that it is always possible to lose money

on whatever investment you make. If you invest in a rare collectible, the value
of it can rise or fall depending on its popularity and its availability on the
market. Stock prices fluctuate based on everything from how the competition is
doing to public confidence in the market.
1. No downside Protection - Investors should remember that despite of all

the advantages that SIPs have, they are subject to market risks and do not
protect investors from making a loss or ensure them profits in falling
markets.
2. Portfolio risk remains - SIPs are also subject to security risk. Mutual
fund schemes investing in portfolios that turns out to generate negative
returns are bound to make investors incur a loss even if the investment is
made through SIPs.
3. It will not work in bullish markets or when market goes up over
time: When market goes up and keeps growing over time , the units
bought every time will be at high price then the previous one, which will
ultimately bring the average cost up , compared to the lump sum
investment at the start.
4. In case of tax saving fund, the lock in period gets extended for every
investment: Tax saver mutual funds lock your money for 3 yrs, when
you invest through SIP, each of your investment is locked separately for 3
yrs from the date of investment. So if you pay your first installment on
Jan 2007 , it will locked till Jan 1 2010 , then the installment paid on Feb
1 , 2007 will be locked till Feb 1 , 2010 and like this each installment will
be locked with the gap of 1 month.
5. SIP returns are lower in consistently rising markets.
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6. Limited options of dates: For a SIP in Mutual Fund you need to decide a
date in advance when you like to do your SIP and give an ECS mandate
for the same. Most of the MFs have limited option (mainly 1st, 5th, 7th,
10th, 15th, etc). So you tend to invest in multiple mutual funds on the
same date. You want to lessen your risk by spreading your SIP in the
entire month by choosing different dates for different funds.
7. Fixed Amount: There are times when you feel that markets are
undervalued and you want to invest more but then in SIP only a
predetermined fixed sum gets invested. Same is the case when you want
to invest less, you can’t do it.
8. Stopping intermediate payment: It may so happen that you got an
emergency or have a major expense this month and so you don’t want to
invest. But with SIP this is not possible; if there’s money in your bank it
will get debited and invested. The only way out is to cancel the SIP which
can be a nightmare if you have a lot of SIPs and also when you want to
start again you need to go through all the formalities to start the SIP. Also
for cancellation you need to inform 2 weeks in advance and even then
you may not be sure that SIP would not be debited.
9. Lot of delay between actual application & start/stop of SIP: I feel this
is very irritating and you may miss one monthly installment; MF houses
need at least a month to start a SIP and around two weeks to stop your
SIP. I think it’s the time they should try and come up with quicker
processing of SIPs.
10.Does not suit people with unpredictable cash flows: Think of someone
who doesn’t have a predictable cash flow like a self-employed
professional. He won’t be able to do SIP as he would be unable to
commit a fixed sum every month.
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Investment is not a gamble so we need to plan before investing. One of the

special investment plans is systematic investment plan.
Before opting for SIPs

SIP option is available for all types of funds. This arises the need for investors
to do a little homework in order to get the maximum returns out of their
investment.
 Defining the investment objective

Investors should invest with a clear objective in their mind. It helps to
figure out an indicative time period for which the investments would have
to be made.
 Determining the investment surplus

Investors should estimate the amount that they can afford to invest on a
periodical basis. Investors should be conservative while making this
estimate as an over estimated periodical investment amount may turn out
to be a burden for investors.
 Matching periodicity to fund flows

SIPs are available in monthly and quarterly options. Investors should opt
for an option that is in tandem with the periodicity of cash inflows.
 Selecting an appropriate scheme category

Before investing investors should take the risk- return profile of a scheme
into consideration. Investors should choose a scheme that suits their
investment objective. For example: Equity funds are recommended to
investors who have a high risk taking capacity, debt funds for risk-averse
investors and balanced funds for investors with moderate risk taking
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capacity.
 Performing fund manager

All fund schemes are managed by a fund manager. Investors should select
a scheme which is managed by a proven and successful fund manager.
However, past performances do not assure good returns in the future, but
do form a basis for decision making.
 Ignore the market swings

In the short term, sentiments drive the movements in the market.
Therefore, investors should not let a short term correction or fall in the
markets to bother them. As long as the long term prospects are intact, the
investments are safe.
 Periodical review of investments

After selecting an appropriate scheme and making investment in it,
investors should continuously monitor the performance of similar
schemes to the one in which the investment is done. This enables
investors to compare the performance of their scheme with corresponding
schemes and make necessary adjustments, if required.
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Chapter No. 8 Working of SIP
An SIP allows you to take part in the stock market without trying to second-
guess its movements.
An SIP means you commit yourself to investing a fixed amount every month.
Let's say it is Rs 1,000.
When the Market price of shares fall, the investor benefits by purchasing more
units; and is protected by purchasing less when the price rises. Thus the average
cost of units is always closer to the lower end.) {NAV: Net Asset Value, or the
price of one unit of a fund. Can be computed as follows:
NAV = [market value of all the investments in the fund + current assets +
deposits - liabilities] divided by the number of units outstanding.}
Date NAV Approx number of units you will get at Rs. 1000
Jan 1 10 100
Feb 1 10.5 95.23
Mar 1 11 90.90
Apr 1 9.5 105.26
May 1 9 111.11
Jun 1 11.5 86.95
Within six months, you would have 589.45 units by investing just Rs 1,000
every month.
26
Ideal Profile of Investors:-
Investors opting to invest through an SIP option should:
have a long-term investment horizon,
be willing to invest regularly,
keep patience, and
who cannot invest enough amount at one go
How can SIP scores
It makes you disciplined in your savings. Every month you are forced to keep
aside a fixed amount. This could either be debited directly from your account or
you could give the mutual fund post-dated cheques.
As you see above, it helps you make money over the long term. Since you get
more units when the NAV drops and fewer when it rises, the cost averages out
over time. So you tide over all the ups and downs of the market without any
drastic losses.
Also, a number of mutual funds do not charge an entry load if you opt for an
SIP. This fee is a percentage of the amount you are investing. And if you do not
exit (sell your units) within a year of buying the units, you do not have to pay an
exit load (same as an entry load, except this is charged when you sell your
units).
If, however, you do sell your units within a year, you would be charged an exit
load. So it pays to stay invested for the long-run.
The best way to enter a mutual fund is via an SIP. But to get the benefit of an
SIP, think of at least a three-year time frame when you won't touch your money.
Of course you would lose money if your units lost value over time.
What most SIP Mutual funds don't tell you is that they recover their fees as
monthly charges by selling your units, so while you are buying more units when
27
the market is down, more of your units are also being sold to fund the monthly
charges of the Mutual fund. Also the Bid and Offer of the Mutual Fund is
around 7% and this is the front load or expense you pay for buying the units
each month. Also sometimes the Mutual fund will have annual fee charges.
From the above write up we can say about SIP in bullets points as below:-
• SIP means Systematic investment Plan

• It is one of the ways to invest in Mutual Funds
• Through SIP you can invest in Mutual Funds in small installments on a
monthly basis
• The investment is done directly by debiting your bank account on a
specified date and Providing you a credit for the units purchased from the
amount
• You can start your SIP by filling up a simple SIP form and providing
bank auto debit Mandate.
• Your SIP does not stop if you miss an installment
• The AMC does not charge you any money for missing an installment
• Your bank however, may charge you as per banks policies
• All SIPs are done in Open ended funds
• There is no lock in for your SIPs (except tax saving funds)
• You can withdraw any amount at any point of time without stopping your
SIP
Do's
• Ensure Sufficient balance in your account on every date of Auto debit

• Link your SIP with your financial goals and do it for long term
Don’ts
• Don't panic with market fall. Continue your SIP in the bad times
28
• In case of a market rise, don't hurry to book your profit

• Keep your investment tenure in mind
Systematic Investment Plan (SIP) Calculator:
Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of

equity investment and still enjoying the high returns. This SIP Calculator will
show you how small investments made at regular intervals can yield much
better returns over a long period of time.
This is software to calculate the return on investment in SIP. In this we have to

fill the details about the following:-
1) Types of mutual funds.
2) Which scheme we are using.
3) Investment amount
4) SIP frequency
5) Date start and the end date.
Why is SIP a Smart choice?
Inculcate financial discipline
Helps you make investment your first priority from it being your last priority.
Average out your cost of investment and hence reduce your risk
Let’s say you invested Rs 1000 every month. And let’s say the scheme invested
in is available at a rate of Rs 20 per unit. Then in month 1, you will be able to
obtain 50 units. In month 2 if the unit value goes down to Rs 10 then you will
be able to obtain 100 units.
29
Hence for Rs 2000 invested over 2 months the total value of your investment at
the end of 2 months is Rs 1500. However if you had invested a straight sum of
Rs 2000 in month 1 when the rate was Rs 20 per unit – your net value at the end
of month 2 will only be Rs 1000/-.
Hence an SIP helps you average out your cost and thereby reduce risk resulting
in generating superior returns.
Helps in compounding your wealth
Getting rich is simpler than you think, here's a simple formula to get rich:
Start Early + Invest Regularly = Create Wealth
Invest Regularly
Systematic investing has a compounding effect on your investments. In the long

term, an investment as low as Rs 1000/- per month swells up into a huge corpus.
This can be best explained by the following graph. The graph shows the value
of investment at various rates of return for Rs. 1000/- invested every month for
30 years.
30
The BSE Sensex has generated returns at 19.43%* CAGR from 1st January
1991 to 1st January 2008. Rs. 1000 invested every month since January 1991
would have led to a total investment of Rs. 3.6 Lakhs. This investment would
have been worth Rs. 2.03 Cr in January 2008.
Did you know that Rs 1,000 invested every month would total to Rs 240,000
after 1 month? Yes – and in the above example we have assumed ZERO growth
rate. To understand the power of compounding further, lets just add a simple
growth rate of 3%. Then Rs 1000 invested every month becomes Rs 327,660.
At 20% the amount will grow to Rs 24,76,191/-. Isn’t that incredible?
Start Early
Now that we know that the power of compounding can create magic for your
investments, starting your investments early also has its own advantages.
Starting early means that the power of compounding starts acting on your
money earlier thereby generating higher returns.
An individual who starts planning for his retirement at 25yrs of age by investing
a modest Rs. 1000 / month collects upto Rs. 40 Lakhs on retirement whereas his
investment over the period is just Rs. 4.2 Lakhs
On the other hand if the same individual delays his retirement planning by 5 yrs,
his wealth upon retirement reduces significantly (approx Rs. 15 Lakhs.)
31
Chapter No. 9 Comparison with Other Investment
1. SIP vs Lumpsum Investing: what works better?
The concepts of SIP investing vs. lumpsum (one-time) investing are two
excellent methods of investing. They actually complement each other and
go hand in hand.
Systematic Investment Plan - (SIP)
SIP investments are a disciplined form of investing where you are

literally forced to save every month. Here, deductions are made
automatically from your bank account into the chosen equity mutual fund
investment, on a specific date for a specific period. In this method of
investing, you will invest in the markets during higher levels as well as
lower levels, and therefore, you will get a weighted average return over a
period of time.
For this, you will also have to follow some simple steps. Firstly, based on
how much you can save, choose the amount that you want to invest
periodically into the target equity mutual fund. Once the amount is
chosen, it remains the same irrespective of whether markets go up or
down. For example, if you decide to do a monthly SIP of Rs 10,000 into
an equity MF, then on a specified date, say, 5th, 10th or 25th of every
month, you will invest Rs 10,000. Every month the net asset value (NAV)
of the fund will change as per the fund's performance and prevailing
market conditions.
32
By investing regularly, you will buy fewer units when NAV is high and
more units when the NAV is low. Here's a simple example. Let's assume
you will start an SIP of Rs 10,000 when the NAV is Rs 275.81 per unit,
you can accumulate 36.26 units (Rs 10,000 / Rs 275.81). In the next
month, if the NAV goes up to Rs 470.87, then you would get 21.24 units
but if the NAV goes down to ?246.13, you would get 40.63 units.
There are flexible SIPs, too, where instalments can be changed depending
on the prevailing market levels. So, when the markets drop, the
instalment amount automatically goes up (that also leads you to buy more
units). SIPs basically are an excellent vehicle for an investor to invest
regularly.
Lumpsum or (One Time) Investment
A lumpsum investment is done when the entire amount in invested at one

go into a chosen equity mutual fund. Lumpsum investing strategies are
mostly done by more educated investors who have a better understanding
of the markets and current valuations or investors with the financial
advisor who understands equity market behaviour.
When to use these two strategies
 Lumpsum investments earn the best results when done as follows:

 When valuations of the shares and markets are low.
 When markets P/Es and specific stock P/Es are low.
On days when markets correct sharply or when there are panic situations
in the market, micro and market environment.
33
For example, the Nifty Bees stood at 537 on August, 2013 and, at 785.38
on March 30, 2016, up 46 per cent. If you had invested a lump sum of Rs
10 lakh in August 2013 in Nifty Bees, you would be sitting on a corpus of
Rs 14.625 lakh today.
Many investors may panic when the markets start falling or edging lower
and may withdraw the investment or not add some more to equity
investments. Both this is not beneficial for the investor. If you have a
well-qualified financial advisor with you or if you are a well-informed
investor yourself, you will actually add more money during these times
for you to get overall high weighted average returns over a longer period
of time. The weighted average returns will go up because you entered at
the lower levels of the market so you will have base effect.
BEST STRATEGY
Combination of lumpsum investments done during the lower levels of

market along with SIP investing is sure to give a sound weighted average
XIRR return over a 3-5 year period. This can be executed only if you
have strict discipline, are well informed about the markets and don't
panic.
Of course, it is impossible to invest exactly at the bottom of the market.

The key to successful investing is actually very simple - buy cheap and
sell high and also be disciplined about investing.
2. SIP vs Mutual Funds
At best, Systematic Investment Plan (SIP) is a way to invest in the mutual

fund (MF) of your choice and build a corpus over an extended period.
34
There are two different types of investment options for you in MF and
one of them is SIP. The other one is the lump sum payment where you
invest amounts once outright and see the money grow!
What is a Mutual Fund?
The mutual fund is a type of pool where money comes from different
investors for investment in varied securities. This investment can be
anything including market securities, shares, and debt securities or their
combination. Investors in mutual funds share both profits and losses that
the securities are prone to in accordance with the fluctuating market.
Why People Invest in Mutual Funds?
Mutual fund is a safe investment mainly because the management of this

fund is through professional services that understand the market and can
make knowledgeable decisions. There is a full time monitoring of the
process present, which makes real time decision making possible.
Execution of trading occurs on cost effective and largest scales to ensure
minimum risk and high returns. Diversification of investment is the key
element and this is the main reason why people prefer this kind of
investment option. This minimizes the risks substantially. The initial
costs of investing in mutual funds are quite low and this makes it a
feasible option for everybody.
What is Systematic Investment Plan?
The Systematic Investment Plan calls for saving small amounts over an
extended period. Through careful and regular investment, it is possible to
create a substantial lump sum, which can help you to tide over financial
constraints or provides the needed help when extra money is required in
35
your personal life. Briefly, SIP plan is all about compounding wealth
through systematic investment on a long-term basis.
Why Should you Invest in SIP?
Those who have long-term plans in their personal or family life are better
off with Systematic Investment Plan when considering mutual fund
investment options. It is necessary to understand that one-time payment
option on the other hand does not give MF investors a high degree of
benefits, since it does not take into account the fund downturn, which SIP
plan does. No wonder Systematic Investment Plan becomes the preferred
option when it comes to investing in a mutual fund of your choice.
Best MF for SIP Plan
Systematic Investment Plan (SIP) is a way to invest in a mutual fund,

which is opposite of the single premium option. Whether you want to
own a car in the near future or keep money aside for the higher education
of your child it is easily possible through SIP. Mutual fund and
Systematic Investment Plan are related to each other and in order to get
the benefit of one you need to go through the other!
36
Chapter No. 10 Conclusion
Systematic Investment Plan (SIP) is the winning strategy in present market

scenario. Small investor can make his/her investment in Equity Fund through
the monthly or quarterly of in multiple of 500 i.e. 500, 1000, 2000….. Small
investor can enjoy the volatility (Ups & downs) by investing regularly. Old
investment in stock market is in present time showing losses event though SIP
investment RETURN is far better in comparison of ONE TIME investment At
this present down trend one can investment in Balanced Fund schemes. An SIP
may not be able to lower the average purchase cost if equity markets rise in a
secular manner.
In such a scenario, the average purchase cost could actually rise. So in a

market rally, SIPs could prove to be more expensive vis-à-vis a lump sum
investment.
37
Chapter No. 11 Webliography
 www.moneycontrol.com
 www.investopedia.com
 www.investmentmantra.com
 www.finweb.com
 www.hdfcsee.com
 www.reliancemutual.com
 www.fundsindia.com
 www.economictimes.indiatimes.com
 www.policybazar.com
38

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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE & ECONOMICS

Systematic Investment Plan

Chapter No. 1 Introduction to Investment

Chapter No. 2 Types of Investments

Grouped under the general category called 'fixed-income' securities, the

A mutual fund is a collection of stocks and bonds. When you buy a

4. Alternative Investments: Options, Futures, FOREX, Gold,

Chapter No. 3 Examples of Investment

1. Government Securities (Bonds):

Bonds issued by Central or State government. These bonds are termed as

Investors can also participate in equities by investing in mutual funds.

Some of The Terms Used In Mutual Funds

Net Asset Value (NAV)

Repurchase Price: - It is the price at which a Mutual Funds repurchases

Redemption Price: It is the price at which open-ended schemes

Sales Load / Front End Load: It is a charge collected by a scheme

Returns offered by these bonds are higher compared to government

Investing in metros has become very expensive so it is advisable to invest

7. Bank fixed deposits:

Currently bank FD’s offer somewhere around 8% to 9% returns annually.

8. Corporate Fixed Deposits:

They offer interest rates as high as 12% to 13% p.a.

An example of this would be – FD by Mahindra Finance, Shriram

9. Post office savings schemes:

10.National Pension Scheme:

Retail investors can invest in commodity with the help of commodity

13.Venture Capital/ Angle Investing:

It is not advisable for a retail investor to invest in these kind of

Chapter No. 4 Introduction to SIP

Systematic investment plan is a vehicle offered by mutual funds to help you

Systematic investment plan is a scheme which allows investors to invest in a

A SIP is a method of investing in mutual funds, by investing a fixed sum at a

Systematic investment plan offers periodical investment option, which is

What is Systematic Investment Plan?

A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help

SIP mainly helps us to get addicted to an investment principle –

Income – Savings = Expenditure, instead of following the principle of –

Income – Expenditure = Savings.

To know about systematic investment plan, it is important to know about

INVESTMENT is putting money into something with the expectation of gain

through collateralized lending, or making a deposit into a secured institution.

Chapter No. 5 Features of SIP

1. Affordable to small investors

2. Low market risk through Rupee Cost Averaging

Chapter No. 6 Advantages of SIP

anybody to time the market. SIPs enable investors to capitalize on upside

8. Helps X to develop the habit of disciplined investing as he/she is

Chapter No. 7 Disadvantages of SIP

The major disadvantage of investing is that it is always possible to lose money

1. No downside Protection - Investors should remember that despite of all

Investment is not a gamble so we need to plan before investing. One of the

Before opting for SIPs

 Defining the investment objective

 Determining the investment surplus

 Matching periodicity to fund flows

 Selecting an appropriate scheme category

 Performing fund manager

 Ignore the market swings

 Periodical review of investments

Chapter No. 8 Working of SIP

Feb 1 10.5 95.23

Apr 1 9.5 105.26

Jun 1 11.5 86.95

Ideal Profile of Investors:-