How to make long term investments through SIP of mutual funds


This article provides an insight into the benefits of investing in SIP mutual funds. You will learn how to invest in SIP of a mutual fund and also understand the meaning of SIP and other commonly used terms like NAV when investing in a SIP plan.

You have heard many times the term SIP. This article provides details about the meaning and various aspects of SIP.

What is the meaning of SIP of a Mutual fund?

SIP is actually a Systematic Investment Plan of investing in Mutual Fund. It is specially designed for those who aim to build wealth over a long period and want a better future for himself and dependents.

How to invest in a mutual fund?

The investment in a Mutual fund can be done in two ways. First way is one time payment i.e. making payment to a fund at once and gets the units of the fund as per the Net Asset Value (NAV) of the fund on that day.

Let's take a simple example: A person wishes to invest in a fund Rs. 24,000/- . On the day of Investment, the NAV of the fund was Rs. 10/-. He thus gets 2400 units @ Rs. 10/- per unit.

The other way of investment is making payment to the fund periodically, which is termed as Mutual Fund SIP. When you commit to invest a fixed amount monthly in a fund, it is called as Systematic Investment.

Benefits of SIP

It is actually beneficial for those investors who wish to invest a large amount in a fund and wish to create a large chunk of wealth for long term but due to financial constraints are unable to do so.

The SIP provides them a way to invest in the fund of their choice in installments.

For example: A person wishes to invest Rs. 24000/- in a fund but due to other obligations, it is not possible for him to invest such an amount in a fund. He takes the SIP route and contributes to the fund Rs. 2000/- monthly for a year. At the end of the year, he'll have invested Rs. 24,000/- in the fund. When the NAV is high, he will get the fewer units and when the NAV is low, he'll get the more units. So, he'll get the benefit of averaging through the SIP route.

The NAV in the first month was Rs. 10/-, he'll get 200 units in the first month
The NAV in the second month was Rs. 9.50/-, he'll get 210.52 units in second month
The NAV for the following month was Rs. 10, he'll get 200 units in the next month
So, at the end of the year he may get more units as compared to the units he'll get through single investment.

Thus the benefits of SIP are:
  1. SIP can be started with a minimum investment of Rs. 500/- per month or Rs. 1000/- per month.

  2. It is good and effective way of creating wealth for long term.

  3. ECS facility is available in case of Investment through SIP.

  4. A small withdrawal from the account doesn't affect the bank balance of an individual as compared to a hefty withdrawal.

  5. It can be for a year, two years, three years etc. if a person at any point of time couldn't be able to continue its SIP, he may give instructions atleast 25 days before to the fund house. His SIP be discontinued.

  6. All type of funds except Liquid funds, cash funds and other funds who invest in very short fixed return investments offers the facility of SIP.

  7. Capital gains, if applicable, are taxed on a first-in first-out basis.

  8. As the investment made through SIP are not at one time. Some units bought at high price and some at low price, so chances of making gain through SIP is higher than the one time investment.


Conclusion

In short, SIP is a simple and effective way to create wealth but to create such wealth, one should think about the investment in SIP for a period of at least for time frame of three years because it pays to invest in a longer run.


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Comments

Author: soubhagya das07 Jul 2009 Member Level: Gold   Points : 1

Dear Monsa this is a very fantastic information and I hope if any of member from ISc will implement it and will start saving(investing) Rs100 in mutual fund either at Reliance or SBI mutual fund then that will be tyhe most beautiful and precious gift for you

Author: monsa08 Jul 2009 Member Level: Gold   Points : 1

Dear Soubhagya,

Definitely it will. Even i am investing in Mutual Funds through SIP and believe me, it is the safest bet.It doesn't burden your pocket with single heavy investment.

SIP is a smart way to invest and grow.

Author: soubhagya das08 Jul 2009 Member Level: Gold   Points : 2

Monsa I am a financial planner I am suggesting my friends to invest in mutual funds through SIPs and they are happy with it.
so you also please advice your friends and show how you have invested and what benefit you are getting then it will attract them and I think we can control our Indian share market instead of depending upon FIIs( Foreign Institutional Investors)

Author: Srikanth Shankar Matrubai21 Jul 2009 Member Level: Bronze   Points : 2

SIP Investment is a no-brainer. They are the best way to minimise risk and still earn through the Stock Markets.
SIPs are very convenient and very easy to participate because of their low minimum investment amount.
In fact, some AMCs like Reliance, SBI, Religare have SIP for as low as Rs.100 per month.
Do you know, if you had invested in Reliance Growth Fund, since its inception 165 months ago, your investment of Rs.100 per month would have meant an outgo of Rs.16500 and can you believe, that simple Rs.100 per month would have now grown into a huge unbelievable Rs.1,97,000!!!! Just under RS.2 lakhs.
That's the power of SIP Investment.
Also read the more about the power of sip in the link http://www.indiastudychannel.com/resources/57447-Systematic-Investment-Plan-SIP.aspx
Best of luck,
Srikanth

Author: vidya bhushan jha24 Oct 2009 Member Level: Bronze   Points : 2

hi dude, sip is the best medium to invest in market, it is the bless the new investor who want to invest in market. 15 to 20 years sip worth ro 1000 per month gives that amount which u dont believe.I want to give some example reliance mutual fund growth gives 19laks by investing 1000 per month. in about 15 years.

Author: aaru31 Dec 2009 Member Level: Gold   Points : 2

Dear Monsa,
You are absolutely correct and i will always suggest my friends to invest in only Systematic Investment Plan (SIP),rather than the Lumpsum investment plan, since there is high chance for us to get high average returns (Profit) and also can be able for us to take participate in all the time (Up's and Down's) of market movements.
and SIP can be started as low as for the amount of even Rs.100/- (Provided by Reliance). This can be even taught to the school children to start their habit of savings.

Author: Vivekanandhan G09 Apr 2010 Member Level: Bronze   Points : 2

Dear Friends,

I could not agree with the concept that SIP is good. SIP is just a tool for averaging. But does not guarantee anything. Those who promote SIP chose their example data carefully such that it gives better return. But it is not so in reality. You can check the attached file for details. Even in long run SIP return dont stand even close to non-SIP return. Difference is too much.

Author: Vivekanandhan G24 Apr 2010 Member Level: Bronze   Points : 2

Dear Srikanth,

I have nothing against SIP. It does allow one to start with small amount and pay every month and many small investors can benefit from it. But my view is that Timing of your entry is as significant as in the case of one time investment. Please follow the link if you want authenticity of the data.
http://content.icicidirect.com/mutualfund/sip_fund_compare.asp?amc=&objective=All&Submit=+Compare+

And the difference is not just 5%. It is as high as 29% in some cases (5 years).

SIP return will be better if the market cure take U shape for your period. If it takes inverse U shape SIP will give you shock. (It is true for bear and bull phases.) Yes it can post you more loss than one time investment. (Guess nobody warned about this till date).

Since market can take any shape which is not in our hands, you cannot say SIP is good or bad. It can just inculcate investment practice. But is affected to the same degree as one time investment as of market timing is concerned.

In nutshell, one time investment has the risk of starting NAV and closing NAV and not affected by the path in between, whereas SIP carries the risk of the path of market graph.

P.S.
Reliance Mutual have has deliberately chosen to compare their SIP return only with SIP return of benchmark. If you want you can check the NAV return of the same period be doing little extra work.

Author: Manoj Kumar Sahu26 Apr 2010 Member Level: Silver   Points : 2

Thank you monsa for your valuable resourse on SIP in mutual funds. This could be an alternate route to post office recurring deposits.

By SIP in mutual funds for a long term period say 5 years would fetch a handsome return in comparison to recurring deposits, although recurring deposit is the safest mode of deposit.

Author: Pravat Kumar Das16 Sep 2014 Member Level: Gold   Points : 5

SIP (Systematic Investment Plan) is the best way for investment. You can invest in mutual funds, equity market, Gold purchase, bank recurring deposit, postal savings etc. The main benefit of mutual fund SIP is an investor will get the best average price. Always remember to invest in mutual fund SIP for 10-15 year which helps you to get best average price as well as the compounding benefits.

That's why it is always suggested to young professionals to start SIP in mutual fund as they have longer time period for investment and they can make a big surplus money before they get retired from there job.

Now days all fund houses or Asset management companies are providing Rs 100 to start as SIP. So do not hurry and do not watch whether market index is at higher level or lower level. Start investment any time and make a plan to invest for 10 year at least.

Author: Swagatika Pattanaik13 Aug 2016 Member Level: Gold   Points : 4

First of all understand why should you invest your money in mutual funds? Suppose you give them money, after that what is happening? Is your money growing or decreasing?
Your money simply goes to direct market to purchase shares of companies, Government bonds etc.
Then why we should not invest directly in these products?
The answer is - we have limited funds, but fund house collect a large money from various members and diversify that money to different companies in different sectors by professionals who are having huge knowledge and experience about predicting the future of that company and shares.
So by mutual fund investment we get personal advisory but indirect way for our funds.
Now come to SIP.
As we know we always have a future goal and that can be fulfilled by money. So by investing some amount in mutual fund monthly wise, we get better return and safety of our fund in long run.
So you should start at early age to get highest benefit from compounding interest calculation.



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