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Published byCullen Thruston Modified over 2 years ago

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You must have heard this statement more than n times now that … SIP is the best investment style So lets understand why SIP has emerged as the most powerful style of investing in recent times through some real life examples….

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There are basically three points that makes SIP such a strong concept Rupee Cost Averaging Power of Compounding Market timing irrelevance Let us simplify these terms in next few slides…

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Rupee Cost Averaging To understand this concept more practically look at the illustration below. The SIP investor finishes with an investment that is worth more than the lump sum investor after six months - even though the starting price and finishing price are exactly the same. Unlikely but it is true. Check the figures yourself ….This is the first thing what SIP does; it averages the buying cost automatically. Month Lump sum InvestorSIP Investor Unit Price (Rs.)Amount InvestedUnits Purchased Monthly Investment Units Purchased Total Invested60000 Total Units Purchased Average Price Paid Value of Investment after six months at current unit price say Rs

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Power of Compounding This mathematical formula of compounding : FV = PV (1 + r) n is known to all of us but is seldom understood in terms of investing. Lets use an example : If you invested Rs PV (Present Value) in a instrument that 15% per year (the r) for a period of 25 years (the n), its FV (Future Value) will become Rs Unbelievingly the amount multiplied to a whopping 33 times Now the lets see how the same compounding plays in a SIP over a period of time. The table below justifies all statements of the Power of Compounding. A meager amount of Rs per month over 25 years at an annualized growth rate of 15% accumulates to a humongous number of approximately Rs. 33 lakhs

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Market timing is irrelevant Lets look at the above analysis in the next slide whether it actually happens … Data Source : Bloomberg

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Time in the market matters; not timing *CAGR (Compound Annual Growth Rate) -The year-over-year growth rate of an investment over a specified period of time Data Source : Bloomberg

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Now that we have seen the Power of SIP; lets try to address this point … When SIP works best for us Few slides from hereon will explain this more clearly

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SIP will work best if following acts are done: Start Early Invest Regularly Invest for Long Term Invest in the Right Asset Class Lets look at each aspect from a practical angle…

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Start Early – Lets flip around and see Cost of Delay through Ram aur Shyam ki Kahani Ram Shyam Starts investing at the age Monthly Investments Rs.5,000 Rs.15,000 Returns (assumed) p.a. 15% 15% Both invest till the age Total investment 18,00,000 each Accumulation at lacs lacs To catch up with Ram, Shyam has two choices Earn on his investment OR Save per month To catch up with Ram, Shyam has two choices Earn on his investment OR Save per 45% p.a. Rs. 1,25,000

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Invest Regularly

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Invest for Long Term Hence longer your SIP Period Lower the risk Greater the effect of compounding More predictable average returns Data Source : Bloomberg

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Invest in the Right Asset Class Undoubtedly Equity is the winner overtime …

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Now that we have seen why and how SIP can best work - a question still remains unanswered …. Can SIP help individuals like you and me in real life situation to meet our financial goals ? Lets try to answer this question through a simple case study and see whether benefits of SIP really work …

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Case Study – Real Life Situation Assume – – You are 30 yrs of age; have a wife and kid – Current Annual expenditure of Rs. 5,00,000 – Retirement expected at age 60 yrs More – – Average prices (i.e. inflation) will rise by 7% pa – After 30 yrs when you retire, the low risk rate of return will be 6% pa (Considering you put all your accumulated corpus post retirement in a bank deposit) – You will live for more 20 years post retirement So lets see what will be the corpus required at the time of your retirement to maintain the same current lifestyle additionally with enhanced medical expenses

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Your Target Current Expenditure Rs.5,00,000 p.a. Expenditure at the time of Retirement Rs. 36,00,000 p.a. Inflated at 7% p.a. for 30 years Income to be generated post Retirement Rs. 36,00,000 p.a. Therefore to generate this income every year post retirement you need to accumulate a corpus Corpus Required at the time of Retirement Your first reaction Impossible! It cannot be achieved. But then there is a solution…

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So whats the Solution… Just one simple thing Subscribe for an SIP of Rs.15,000 per month in a good diversified equity fund for 30 years and forget it You still dont believe it that it can be that simple; let us validate our conviction with actual returns generated in a equity fund over the years HDFC Equity Fund SIP Investments15 year SIP10 year SIP5 year SIP3 year SIP Total Amount Invested (Rs.)2,700,0001,800,000900,000540,000 Market Value as on July 29, 2011 (Rs.)34,379,0938,682,0241,427,405798,522 Returns (Annualised)*(%)29.87%29.64%18.56%27.29% Benchmark Returns (Annualised)(%)#15.87%18.42%8.36%14.08% Market Value of SIP in Benchmark#9,967,0574,737,4231,110,339664,982 From the table it is crystal clear that if an investor did an SIP of Rs per month in HDFC Equity Fund for 15 years, he would have invested 27 lacs and that would have grown to a whopping number of 3.4 crore as on date; in spite of so many pitfalls in equity markets in last 15 years.

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Still need to think; No pressure but see this what the delay can cost in the same case study 9,60,000 5,76,000 2,32,000 1,80,000Annual 80,000 48,000 21,000 15,000Monthly Investment Required Time to Retirement (yrs) Current Age : 30 years Retirement Age : 60 years Retirement Corpus to be accumulated : 8 cr. Assumed Rate of Return on Investment : 15% p.a. With every passing year the time to retirement is reducing and increasing the burden of investment required. Now the choice is our whether we want TO START NOW OR STILL WAIT Today After 5 years from now After 20 years from now After 15 years from now

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