Why is investments in SIP considered a good option?



Many people advise about investing in systematic investment plans (SIP) in good mutual funds. Since I am new in investment matters, I am trying to understand why that is so.

1. Why does it involve less risk than investments made in the same mutual fund for the same amount and for the same period? (my understanding about these issues is immature, so the question itself may not be proper) (eg, consider investment of Rs 1000 for five years through SIP and investment of Rs 60,000 at a time in the same mutual fund: which one is better in the long run?)

2. Why is it assumed that after say 15-20 years or so, the returns are expected to be very high?

3. I invested (for tax saving) in an Mutual Fund when NAV per unit was Rs 42. Now NAV is Rs 39 per unit. The amount invested will be locked for 3 years. The past performance was of the fund was good. But what if NAV value keep decreasing day by day? Theoretically what would be my maximum loss? the entire amount invested?

Why is investments in SIP considered a good option?
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3 Replies to “Why is investments in SIP considered a good option?”

  1. Hi,
    Its true that investing in SIP always is safer for a starter.
    Assuming you invest Rs.1000 (SIP) mode, and lumpsum of RS.10000.00 (One time) and your NAV 10 per unit.
    If the stock market falls on a particular day and if your NAV come down to 8, then your Rs.10000, will go down to Rs.8000 and your SIP amount of RS.1000 will go down to Rs.800.
    Your investment of one time will take longer to grow and the number of units under this will notge, but in SIP you number of units you buy every month will change and your averaging your profit/loss.
    This is why you save and also safe guard your returns on SIP investment.

    Stock market investment are always best in long term, beacuse it averages your profit and loss, and after a said number of years your profit will go higher, this will stand as a cusion if the markets fall like what we saw in the year 2007.

    The Mutual Fund Net Asset Value or NAV is the total market value of all the assets, including cash, held by the fund, after deducting its liabilities. The per unit NAV represents the market value of one unit of the mutual fund. It is the price at which investors can buy or redeem the mutual fund’s units. The per unit NAV is computed by dividing the total value of all the assets of the mutual fund, less any liabilities, by the number of units outstanding. NAV decreases because of the stocks listed on our BSE and NSE rises and falls, depending on the buying and selling that happens in a trading day.

    Theoretically what would be my maximum loss? the entire amount invested?
    The max loss or gain depends on the peformance of the fund and there can be a max loss too.


  2. Dear Abhik,

    Let me answer your questions one by one.

    1) Investing the whole amount in lump sum is considered risker than through SIP. As it may so happen that you might end up investing when the market was at the peak. If you had invested at regular interval you will be investing at a average price. This might reduce the returns but will also reduce the risk associated with the investment.

    2) If a business gives a return which is less than the inflation is actually a loss making business. If your business a notch over the inflation rate and if you compound that extra earning for a long time you will see phenomenal returns. But you need to understand that inflation is also compounding over the same period.

    3) In the scenario that you have mentioned the maximum loss that you can incur is the amount you invested in the tax saving fund.But if the fund you invested in is a decent fund it will ultimately come up again and will not go to zero.

    Hope this answers your questions.

    Thanks and regards,
    Ripul


  3. 1) Nobody can predict the share market correctly in the short term. In the long term equity has given the best returns. If you invest lump sum in a fund , and if the market comes down , then there is a time loss for it to recover. By investing via SIP , you average it out. If the NAV falls you buy more units & if the NAV goes up you buy less units automatically. Ideally you should invest via SIP for a long term. Most people stop SIP when the market is falling . You should at least complete a full cycle ( up & down)

    2) Equity is the best avenue for the long term.

    3) If you have opted for dividend pay out – you would have recd the dividend. NAV falls after dividend.
    Always opt for dividend pay out. Always look for value research rated funds. ( 5* or 4*)

    Visit http://www.valueresearchonline.com to learn more about mutual funds





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