SIP Investment- The perfect Christmas gift
Reward your children and spread the cheer, SIP by SIP
Christmas is around the corner! This season of joy is characterised by love, compassion, and the act of giving to others. For children, Christmas is all about gifts from Santa Claus. Santa Claus, or Saint Nicholas, or Kris Kringle, by whichever name, is a legendary figure who is said to have lost his parents as a young man and used his inheritance to help the poor and sick. Over the centuries, Saint Nicholas transformed from a deeply compassionate man to the magical, jolly, bringer of gifts to children on the night of Christmas Eve.
Here’s an idea for this Christmas. Why not gift your children a bright financial future, in addition to traditional items like toys, games, and chocolates? Small steps taken by parents in the form of systematic investments plans, or SIPs, in the children’s name, can go a long way in fulfilling their bigger dreams. So let us explore the magic of SIPs in this article, to help your young ones stay cheerful not just on Christmas, but well into the future, too.
How SIPs works
SIPs are similar to recurring bank deposits in the method of saving. Investors contribute a fixed sum of money at regular intervals, accumulating the required corpus towards a goal. Conventional goals in case of children usually include: paying school fees, funding higher education, or wedding expenses.
Some of the major advantages of SIP are as follows:
SIP inculcates a disciplined approach to investment - There are several mantras of investing. Timing the market is one. Here, investors try to time entry and exit, and accordingly take investment decisions. This strategy can be rewarding in case of accurate prediction. However, in reality, it is difficult to predict the market, making it a risky strategy for individual investors. Further, market timing calls for a lot of expertise, research, and time. So rather than timing the market, spend more time ‘in the market’. This can be done through SIPs, which ensure you invest both at the high and the low points of the market, and thereby make the best of both worlds - through rupee cost averaging. Systematic investing also helps to capture every opportunity which is otherwise difficult to forecast, provided you continue the
SIP across market cycles.
Long term investing via SIP provides compounding booster to your investment – Returns from equities and equity mutual funds often allure investors, but they refrain from investing in them, owing to inherent volatility of the asset class. Historical analysis shows equities are susceptible to volatility in the short term and have exhibited the potential to deliver better returns over the long term. For instance, the S&P BSE Sensex has returned average 15% for 15-years holding period on the daily rolling return basis since its inception in 1979 till November 30, 2019.
Long-term performance trajectory of the market is positive despite negative events
Source: BSE, Note: Red circle shows historical negative biases; Data till December 4, 2019
While staying invested in equities is one part of the story, having the wherewithal to identify good companies and also the capital to invest is quite another. Instead, investors could consider investing in equity through professionally managed investment avenues such as equity mutual funds. The SIP route is one way to invest in
equity mutual funds and derive optimum returns from the asset class.
Investment via SIP is bound to be more fruitful if done over a long term, starting early. Compounding – sometimes referred to as the eighth wonder of the world - can deliver amazing results, as the returns on principal is reinvested, helping to multiply the investment manifold over the years. As seen in the chart below, three investors A, B and C started a SIP of Rs 2000 per month. Assuming returns of 15% (explained in note to chart), they stayed invested for the different time periods. Among the three, investor C was able to accumulate most wealth as he stayed invested for the longest period, helping him to harness the compounding effect best. Investor C’s actual investment of Rs 4.80 lakh would catapult to Rs 26 lakh over the 20-year period, which he can use for funding his children’s higher education. Long term investing also helps smoothening out creases caused by short-term volatility on the portfolio.
How compounding works wonders over the long term: An illustration
Notes: i) Monthly SIP of Rs 2000 is considered for analysis ii) Rate of return assumed is 15% (it is assumed on the basis of 15-year daily average rolling return of S&P BSE Sensex from inception till November 30, 2019)
Benefit from rupee cost averaging – Regular investment through a SIP helps to average the cost of the investment - a concept popularly known as rupee cost averaging. In other words, more units are purchased when a scheme’s net asset value (NAV or unit cost) is low and fewer units when the NAV is high. Hence, when the two cases are taken together, the cost is averaged out. Rupee cost averaging also helps to eliminate the impact of market volatility since investment is done across the market cycles. As seen below, with a monthly
SIP Investmentof Rs 2000, assuming NAV of Rs 26, the investor can buy 77 units. The following month, when the NAV falls to Rs 24, the investor is able to buy more units. The average cost of investment after five months of investing is Rs 23. Had the investor invested a lump sum of Rs 10,000, the cost per unit would have been more (Rs 26). Thus, the longer the time frame, the greater the benefits of averaging.
Understanding rupee case averaging with a hypothetical example
Note: For illustration purpose only
Enjoy ease of investing without feeling the pinch - On Christmas eve, parents can start a SIP easily by providing a one-time instruction on the scheme including the amount, scheme name, and bank details, to the fund house. Accordingly, the amount will be automatically debited every month or any other frequency decided upon. Apart from convenience, SIP is also pocket friendly. Often, investments are delayed using the excuse of no or low money availability. SIP resolves this issue, by allowing you to start investing small amounts such as Rs 500 or Rs 1,000 per month. This amount may look small now, but builds a sizeable corpus for meeting several milestones across life stages.
In a nutshell: Start now, be regular, stay invested in Systematic Investment Plan
A host of advantages make SIPs an ideal investment solution for your children’s dreams. However, you need to get a headstart to financial planning by starting a SIP early, being patient, and continuing the SIP across market cycles to capture every market opportunity. So add discipline and direction to your investment by starting a SIP this Christmas.
Investors shall always refer to the Scheme Information Document and Key Information Memorandum of the schemes carefully to understand the investment objective and associated risk factors of the scheme before investing.
Any comparison mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.