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Retirement Plannnig - 4 (Systematic Investment Plans) Research Team | Posted On Monday, May 25,2009, 03:57 PM

Retirement Plannnig - 4 (Systematic Investment Plans)



Investing in Mutual funds through systematic investment plans is much easier and efficient. Investors recommend it as one of the best ways to raise your investment over time. SIP is an investment choice that is currently available only with Mutual funds. The other investment option comparable to SIPs is the recurring Deposit schemes from Post office and banks. Basically, under a SIP option an investor commits making a regular (monthly) investment in a particular mutual fund/deposit. The Systematic Investment Plan (SIP) is an easy and time pleased investment plan for accumulation of wealth in a disciplined manner over long term period. The plan aims at an enhanced future for its investors as a SIP investor gets good rate of returns compared to a one time investor.

A big benefit with Pension Schemes is that they offer Tax incentives. Another investing selection you can make use of is what is recognized as a Systematic Investment Plan (SIP) of open-ended schemes of Mutual funds. To compensate for tax breaks a SIP offers more flexibility and helps you to know about funds that suit your risk-return profile. For instance while saving for pension an investor in the 25-30 age group could go in for a SIP of an open-ended growth fund. As he approaches retirement he could shift to an open-ended debt fund. And finally on retiring, he could choose systematic withdrawal plans.
The advantage that SIPs offer over other Pension Schemes is that the asset allocation keeps pace with your changing risk-return profile. Besides investing this way offers immediate liquidity whenever you require it (on a no-load basis after a certain period) as well as profits (under Sections 54EA and 54EB) which are not available with other Pension Schemes.
What is Special in Systematic Investment Plan?
·         An exact amount should be invested for a continuous period at regular intervals.
·         SIP is a regular saving system like a recurring deposit. It is a method of investing a fixed sum frequently in a mutual fund.
·         SIP allows the investor to buy units on a given date every month. The investor decides the amount and also the Mutual fund plan.
·         While the investor's investment remains the same, more number of units can be bought in a declining market and less number of units in an increasing market.
·         The investor automatically participates in the market swings once the option for SIP is made.
Investing in SIPs
·         The SIP option is accessible with all types of funds like equity, income or gilt.
·         An investor can benefit the SIP option by giving post-dated cheques of Rs 100 or more according to the funds’ policy.
·         If an investor needs to alter his investment amount in any given month he will have to fill in a new a form for SIP intimating the fund that he is altering his SIP structure. Also he will be allowed to change the SIP structure only in the multiples of the SIP amount.
·         If an investor is investing in two different schemes of the same fund he can fill in a common SIP form for all the schemes. However if the first holders in those schemes are different than they will have to fill different SIP forms as the first holder has to sign on the form.
·         The investor can get out of the fund i.e. redeem his units any time irrespective of whether he has concluded his minimum investment in that scheme. In such a case his post-dated cheques will be returned back to him.
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Advantages of Systematic Investment Plan  
Following are the major advantages of a Systematic Investment Plan;
·         Power of compounding
·         Rupee cost averaging
·         Convenience
·         SIP features
Power of compounding
The power of compounding underlines the essence of making money work if only invested at an early age. The longer one delays in investing, the greater the financial weight to meet desired goals. Saving a small sum of money frequently at an early age makes money work with greater power of compounding with significant impact on wealth accumulation.
Rupee cost averaging
Timing the market steadiness is a difficult task. Rupee cost averaging is an automatic market timing device that eliminates the need to time one's investments. Here one need not worry about where share prices or interest are headed as investment of a regular sum is done at normal intervals; with fewer units being bought in a declining market and more units in a rising market. Although SIP does not assurance profit, it can go a long way in minimizing the effects of investing in volatile markets.
SIP can be operated by simply providing post dated cheques with the finished enrolment form or give ECS instructions. The cheques can be banked on the particular dates and the units credited into the investor's account. The SIP capability is available in the Principal Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, Growth Fund, Equity fund and Tax Savings Fund.
SIP features
Disciplined investing is very important to earn good returns over a longer time frame. Investors are saved the bother of identifying the ideal entry and exit points from volatile markets. SIP options such as equity, debt and balanced schemes offer a range of investment plans. While there is no entry load on SIP, investors face an exit load if the units are redeemed within a fixed time frame. The achievement of your SIP hinges on the performance of your selected scheme.
Example for SIP Investment
An investor, Sanjay wants to invest in fund ‘X’ which can be an equity, income or gilt fund. The policy of fund ‘X’ for incoming in an SIP is that the investor will have to issue 6 post-dated cheques of Rs 500/- in case of monthly option or 4 cheques in a quarterly option. The minimum investment for all its schemes is Rs 5,000. Sanjay issues 6 post-dated cheques of Rs 500/- each in the name of fund ‘X’, with the first cheque being dated as on 8th May 2009.
Now in the month of August 2009 Sanjay needs to change his SIP structure from Rs 500/- to Rs 1,000/-. In this case he will have to intimate the fund and will have to fill a new SIP form issuing news post-dated cheques of Rs 1,000/- each. Sanjay is investing in three different schemes of fund ‘X’. In two of the schemes Sanjay is the first holder and in the third scheme his wife is the first holder. In this case he can fill a general SIP form where he is the first holder and where his wife is the first holder he will have to fill in a new SIP form.
In the month of September 2009 Sanjay wants to exit from the fund. He will have to just give a redemption demand to the fund wherein his units will be redeemed and his remaining post-dated cheques will be returned back to him irrespective of whether he has finished his minimum investment in the fund. Investing in SIPs is also recognized as Rupee cost averaging. The benefit of rupee cost averaging is that the Net asset value (NAV) is averaged out as the investor will be entering the fund at different NAVs, which may be senior or lower depending on the market condition.
Let’s take the example of Sanjay wherein he is in progress investing in units every month since he issued the first cheque on 8th May 2009. In this example we assume that he does not change his SIP structure and also does not redeem the units.
Investment in Fund X

NAV(Rs per unit)
Units allocated
8 May
8 June
8 July
8 Aug
8 Sept
Avg. = 10.2

Actual average NAV (Rs.) = Rs 10.2 per unit
NAV for Sanjay= Rs 9.95 per unit
The above table shows clearly how rupee cost averaging works and how it was helpful to Sanjay. The actual average NAV of a fund is Rs 10.2/- per unit but the average NAV for Sanjay is Rs 9.95/- per unit, which is lower than the current NAV.
An investor who is not having a lump-sum amount to invest and also does not want to take much risk on his investment, can always select a Systematic Investment Plan option. This will allow him to invest regularly i.e. improve investing discipline. Also the investor stands to benefit from rupee cost averaging.
How SIP will suit you?
Systematic investment is especially precious for the investor who wants to get his investments going but doesn't have a large sum of money to invest. Systematic investment works mainly well if you fear that you might buy a mutual fund at its peak, just before the stock market and your fund's shares head into a slump. It offers a restricted way to invest a portion of your income at regular intervals without trying to second-guess the market thereby also protecting you from extreme fluctuations in the market. And its effect on your investment's growth over time can be nothing short of amazing. This concept is called rupee cost averaging. In addition to helping you organize the process of investing, the SIP offers some important advantages that may boost your chances of achieving your Retirement goals.
Three things to Know
Following are the three important things to keep in mind while investing in SIP.
Pay yourself first
SIP ensures that you attend to your long-term goals before you're tempted to spend the money on a fancy new sound system. A SIP gives investing for your future the same significance as your other periodic payments your monthly bills, for example. As a result you are much more possible to attach with your plan until you reach your goal. It's a great way to both save for three years towards a down payment on a house or for thirty years for your retirement.
Reduce your average cost of investing
When you invest the same amount in a fund at usual intervals over time you buy more units when the price is lower. Thus you may decrease your average cost per share over time. This strategy called rupee cost averaging helps make market fluctuations work for you and reduces the risk that you'll invest all your money just before a market downturn.
Rupee cost averaging offers its greatest benefit with investments that tend to frequently fluctuate in price, which is why systematic investment plans can be especially effective when used in buying equity funds. The NAVs (net asset value) of these funds can vary widely, but through rupee cost averaging a SIP can make this volatility work for you.
However rupee cost averaging may not work well if the market rises continuously. Also it is of little use if you are buying units of a debt or money market fund. Keep in mind that rupee cost averaging cannot guarantee a profit or protect you against a loss in a declining market. So select an amount you feel comfortable investing under all market conditions.
Do not put off investing
It is easy to holdup investing until you believe the time is right. But putting it off means you're not utilizing one of the most potent benefits available to long-term investors: the power of compounding. When you reinvest your dividends and capital gains they can add significantly to the increase potential of your investment over time. And the longer you invest the greater the effect of compounding.
Depending on your risk profile and keeping your goals in mind identify a few (not more than four) funds that would act as a vehicle for accumulation of wealth. Choose between a SIP of an equity fund and an SIP of a debt fund.
SIP helps you in
·         Inculcate financial discipline
·         Reduce the risk
·         Compound the returns
·         Plan and build for your Retirement
·         Accumulate Wealth in a much relaxed manner
·         Overpower the temptation to spend lavishly
Inculcate financial discipline
SIP helps you make investment your first priority from it being your last priority.
Reduce the risk
An SIP helps you average out your cost and thereby reduce risk resulting in generating superior returns. It is the best way to participate in equity markets without taking too much of risk.
Compound the returns
Each rupee you invest earns a return which ends up as more rupees to earn a return, allowing your investment to grow at a fast pace. Systematic investing thanks to the power of compounding helps you reach your investment goals sooner.
Plan and build for your Retirement
It helps you to be present at to your long term goals before you're tempted to spend the money on anything else.
Accumulate Wealth in a much relaxed manner
It is calculated to help accumulate wealth over the long-term, without having to keep aside huge sums of money (a SIP can be started with as little as Rs. 1,000 a month).
Overpower the temptation to spend lavishly
An SIP acts as a forced saving, and thereby helps you overpower the temptation to spend unnecessarily.
Benefits of SIP to the investors:
Following are the important benefits that a customer can receive by investing in SIP
·         Makes market timing irrelevant
·         Helps you to build for the future
·         Compounds returns
·         Lowers the average cost
·         Light on the wallet
·         Saving for different Investment goals
·         Opportunity Cost saved by the Investor
The best way of Retirement Planning is investing in a systematic investment plans (SIP) of a mutual fund (MF) scheme. SIP Plan allows you to invest as little as Rs 100 a month in an MF scheme of your choice. You can invest even with a small amount every month in a plan for a minimum of 12 months. The best thing that a SIP promises, experts say is to bring financial discipline into your life. Most people start investing at some point in life. But a majority fails to continue with it or review it periodically. Finally money gets stuck somewhere mostly in some unproductive assets. SIP also ensures that you don’t waste time to build a decent amount before kick-starting the Retirement Plan.  In our next article we will discuss about PPF Public Provident Fund as a Retirement Tool.

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