An SIP or a systematic investment plan is a hassle-free and smart method of investments in mutual funds. It permits investors to park a pre-determined specific amount of money at regular intervals in mutual funds. SIP can be termed as a planned process to investments and which assists people imbibe the habit of saving and creating a wealth base for the future.
Working mechanism of SIP
SIP is an easy and flexible investment strategy. The money for SIP gets auto-debited from an investors bank account into a particular mutual fund. As per the net asset value or NAV of the scheme on that specific day of auto-debit, the investor is given a certain number of shares/units.
Whenever investors invest funds via SIP, units of the mutual fund scheme are bought at the ongoing market rate and parked into the investors’ account. Units are thus purchased at varied rates and investors accrue the advantage from ‘Power of Compounding’ and ‘Rupee-Cost Averaging.’
- Power of Compounding: Compounding of interest follows a simple rule. The sooner people begin investing, the more time they have for their money to compound or grow.
- For example, if you begin investing at age 40 with monthly savings of INR 5,000 and continue it for 20 years, then the total deposits will amount to INR 12 lakhs. Now, with a compounding annual average interest rate of 8 percent, the total amount available for you at age 60 years will be INR 29.6 lakhs. In same scenario, if the investment had begun at age 30, then total deposits would be INR 18 lakhs. And with 8 percent average annual compound interest, the total amount available at 60 years will be INR 75 lakhs. This is more than twice the amount that you would get with only ten more years of investment.
- Rupee-Cost Averaging: Most investors stay unconvinced about the right time for investment due to the volatile nature of markets. Hence, they try to guess the right time of entry into the investment market. With Rupee-cost averaging investors have the option to stop guessing and plan their investment. It is a known fact that lower price allows for purchase of more units, while higher price means lower number of units can be bought. During volatile times, it permits investors to get a reduced average cost per unit.
Advantages of SIP
- SIP is very flexible. Experts recommend continuing SIP investments with long-term goals in mind, but this is not mandatory. The plan can be discontinued whenever you want. The amount that you invest can also be reduced or increased as and when you want.
- Investments achieve success only with discipline. SIP investments require a commitment from investors of regular savings. Such disciplined method of saving allows each investment to act as a step forward towards the goal of financial gains.
- SIP is an easy, convenient, and simple method of investments. Investors can provide standing instructions to their banks to allow auto-debits at regular intervals from their bank accounts.
- Power of compounding SIPs and rupee-cost averaging facilitate long-term gains and attractive returns on the investments.
What is the Best Date for mutual fund SIP?
Monthly SIP investments is the best way to ensure financial gains arising out of the effects of market volatility on your equity fund investments. With the fact that only 28 days are available for investment every month, the question now arises whether investing on a specific day offers better returns as compared to SIP investments on other days.
Most AMCs and other places allow SIPs only on specific days. Thus, allocation of mutual fund units and debit of specific amount from the bank account can only occur on those particular days. Typically, these dates are 5, 10, 15, and 25 of every month.
Several studies have been done to find if SIP investments on certain dates offer better yields than SIP investments on other dates. One such study took equity from all categories like multi-cap, small-caps, and large-caps, etc., as well as the major share market indices. The returns of investments made on different days were then compared with each other.
It was found that the returns on investments which were made at the end of the month were a tad higher than returns of SIP investments on other days. The derivative expiry on the final Thursday of every month generally increases the market volatility during that period; this is the reason for the minor increase in returns.
Thus, investors who want to eke out the last bit of gain for their investments may choose to go for SIP investments at the end of the month. However for investors who are not too keen on the slightly higher returns, any day is a good day for SIP investment. The returns on all days of the month are almost the same, and the difference in returns between SIP investments on varied days is always less than 1% point. Such differences in yields remain minor even for SIP investments over a long period of 7 to 10 years. It is known that weekly investments do not offer better yields than monthly SIP investments, and the same is the case with long-term SIP investments.
Starting SIP investments at the beginning of each month is more convenient as that is the time when the salary gets credited to the account. It is possible to lose tract of the account balance as varied household expenses eat up into our bank balance. Hence, it is easier to invest at the start of the month when there is sufficient balance in the bank account. Investors who wish to make SIP investments at the end of the month need to ensure that adequate funds are available in their accounts at the time of SIP due date. Such investors can also go for a separate account for SIP investments in order to altogether avoid the scenario of lack of funds on the due date.
*Mutual fund investments are subject to market risks read all scheme related documents carefully