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Sip – Systematic Investment Plan Essay Sample

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  • Word count: 1,213
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Introduction of TOPIC

The real rate of return is the inflation-adjusted return that one gets by putting money in investment products like bank fixed deposits, equity mutual funds , gold or real estate. For eg.,if i keep Rs 10,000 in an FD that gives 9% annual rate of interest, at the end of the year i will get Rs 10,900. But, if the rate of inflation during the same period was 10%,i.e., the rate of interest is lower than the rate of inflation, at the net basis I am losing 0.9%, i.e, my real rate of return is=1.09/1.10-1= -0.9% .

In other words, what i can buy with Rs 10,000 today will cost me Rs 11,000 at the end of the year but my Rs 10,000 in bank FD will grow to just Rs 10,900,thus leaving me with a shortfall of Rs 100.And if I am paying income tax, that is I am in the tax bracket, then after paying for my taxes on the interest from the FD, my actual return would be even less. If I have put my money in FDs to take care of financial needs in future, I will find it increasingly harder every year to meet expenses with the returns from the FDs. In such a situation, I will have two options: shell out more to continue to have the same lifestyle or cut down on the expenses, which means compromising on the standard of lifestyle. If I want to meet future financial needs, I should be concerned about beating the inflation in the long run. So my decisions should be based on inflation-adjusted rate of return and not on the nominal rate of return. Investors are more concerned about the loss of capital in the short run, but inflation is a bigger risk in the long run, which remains invisible a silent killer.

If they understood how inflation affects returns from their investments, not so much money would go into debt instruments. Financial planner, advisors and investment professional say although most Indian investors put their money into debt, gold and real estate, in the long run returns from debt barely give positive inflation adjusted return, while returns from gold are only slightly better. Real estate, however, had given positive inflation-adjusted returns in the long run. However, they say that equity and equity-related investments like mutual funds are the best investment products which can beat the inflation in the long run. Equity and mutual fund investments enjoy double advantage: First, historical data show that in the long run, that is over 10,15,20 years, equities have always given higher returns. Second, because long-term capital gains from equities are tax free for investors, these investments are tax efficient when compared to debt or most other investment products.

For long-term investments, the prefer

red option should be equity and equity mutual funds. Another point of consideration is the lifestyle

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inflation. Suppose I am using a phone that costs Rs 10,000. Now,i bought a new handset is launched in the market costing Rs 22,000. Here, without any commensurate rise in my income, I have spent 122% more on a handset in probably less than a year, There is no limit to this inflation. Other than investing in equities and equity mutual funds, To neutralise the effect of inflation, the government allows investors to use indexation so that only inflation-adjusted positive return is taxed and not the full return from investment instruments like fixed maturity plans (FMPs). However if I analyze above options, I need to actually check whether the above options beat the inflation. If I had invested in a large-cap equity mutual fund at the beginning of 2008, my money would be worth roughly the same, or even less, today.

Meanwhile, inflation has galloped at 8-10 % per annum. Some of those who had entered in early 2008, when the market had peaked,hung on to their investments, waiting patiently for their funds NAV to recover. They got their chance when the market touched an all-time high in November 2010, only to slide down in 2011. When the market recovered in 2012, many mutual fund investors redeemed their investments. Now that the indices are again at higher levels, many more small investors will be anxious to head for the exit. As per Computer Age Management Services(CAMS) , nearly 11.5 lakh SIPs in equity funds have been terminated in the past year and another 4.93 lakh were not renewed. Although the SIP cancellations continued throughout the year, they gathered steam after the Sensex broke out decisively above the 17,000 level in August 2012. Today, the Sensex has touched 20,000 mark, which means that many small investors have lost out on an opportunity to create wealth.

As mentioned earlier, the investors who entered the equity market at the peak in early 2008 have hardly made any money. Many of those who invested lump sums are either sitting on losses or have barely recovered their principal. The SIP investors, however, have a different story to tell. Their investments have earned handsome returns. The Quantum Long Term Equity fund has been the best performing large- and mid-cap equity fund in the past five years. If i had invested 3 lakh in it at one go on 1 January 2008, my investment would have grown to 4.35 lakh, a return of 7.72%.However,if i had invested through monthly SIPs of 5,000, the value of your investment would be higher at 4.76 lakh,a return of 17.16%.

Stopping my SIP when the market is doing badly is perhaps the worst investing decision i can make. If i invest when the market is subdued, my SIP will buy more units because the prices are low. By terminating my SIP, i forfeit the opportunity to buy low. Over time, the purchase cost per unit is averaged out, which reduces the risk of investing a large amount at the wrong time and at a high price. However, SIPs are not an ultimate for all stock-related risks. They only inculcate investing discipline and take away emotions from investing. SIPs may not always work in our favour. In some market conditions, lumpsum investments score over a staggered strategy. Even so, we must remember that lump-sum investment is not an option that everyone has. For a small investor like me, earns an income in monthly intervals, a lump-sum payment is not possible.

Termination: SIP should be for a long period to harness its full potential, we should not continue with it indefinitely without checking on its performance. An SIP should not be taken as a fire and forget investment. One needs to keep track and review periodically to ensure the realization of goals. While monitoring the fund, we need to compare its performance over different time frames with other schemes in the same category. Only if the fund consistently underperforms the category should we consider switching over to another scheme. If the chosen vehicle is underperforming, shift to another, but stay committed to the market. We need to keep an eye out for any undesirable change in the fundamental attributes of our scheme, such as a rise in the expense ratio, revision in the investment mandate, investment style or changes in its stewardship.

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