I don’t have enough money to invest I’m too busy making money to worry about managing it. I don’t have the time or expertise to follow market movements and make investments at the right time SIP is an investment program that allows you to contribute a fixed amount (as low as Rs. 1000/-) in mutual funds at regular intervals. RR Investors Retail Services (P) Ltd.
You must have heard this statement more than n times now that … “SIP is the best investment style” So let’s understand why SIP has emerged as the most powerful style of investing in recent times through Some real life examples…. RR Investors Retail Services (P) Ltd.
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… RR Investors Retail Services (P) Ltd.
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. RR Investors Retail Services (P) Ltd.
Power of Compounding This mathematical formula of compounding : FV = PV (1 + r) is known to all of us but is seldom understood in terms of investing. Let’s use an i.e.: 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 let’s 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 approx Rs. 33 lakhs RR Investors Retail Services (P) Ltd.
Market timing is irrelevantMarket timing is irrelevant Data Source : Bloomberg Let’s look at the above analysis in the next slide whether it actually happens … RR Investors Retail Services (P) Ltd.
Time in the market matters Market Timing VS not timing Data Source : Bloomberg *CAGR (Compound Annual Growth Rate) -The year-over-year growth rate of an investment over a specified period of time RR Investors Retail Services (P) Ltd.
Now that we have seen the Power of SIP; let’s try to address this point … “When SIP works best for us” Few slides from hereon will explain this more clearly…. RR Investors Retail Services (P) Ltd.
SIP will work best if following acts are done: Start Early Invest Regularly Invest for Long Term Invest in the Right Asset Class RR Investors Retail Services (P) Ltd.
Invest for Long Term Data Source : Bloomberg Lower the risk Greater the effect of compounding More predictable average returns Hence longer your SIP Period RR Investors Retail Services (P) Ltd.
Invest in the Right Asset Class Undoubtedly Equity is the winner overtime … RR Investors Retail Services (P) Ltd.
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 ? Let’s try to answer this question through a simple case study and see whether benefits of SIP really work … RR Investors Retail Services (P) Ltd.
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 let’s see what will be the corpus required at the time of your retirement to maintain the same current lifestyle additionally with enhanced medical expenses RR Investors Retail Services (P) Ltd.
Current Expenditure Rs.5,00,000 p.a. Inflated at 7% p.a. for 30 years Expenditure at the time of Retirement Rs. 36,00,000 p.a. Income to be generated post Retirement Rs. 36,00,000 p.a. Corpus Required at the time of Retirement Your first reaction Impossible! It cannot be achieved. But then there is a solution… Therefore to generate this income every year post retirement you need to accumulate a corpus R R Investors Retail Services (P) Ltd.
So what’s 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 don’t believe it that it can be that simple; let us validate our conviction with actual returns generated in a equity fund over the years From the table it is crystal clear that if an investor did an SIP of Rs per month in 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. Equity Fund SIP Investments15 year SIP10 year SIP5 year SIP3 year SIP Total Amount Rs per month ( 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 (Annualized)*(%)29.87%29.64%18.56%27.29% Benchmark Returns (Annualized)(%)#15.87%18.42%8.36%14.08% Market Value of SIP in Benchmark#9,967,0574,737,4231,110,339664,982 RR Investors Retail Services (P) Ltd.
Still need to think; No pressure but see this what the delay can cost in the same case study Time to Retirement (yrs) 9,60,0005,76,0002,32,0001,80,000Annual 80,00048,00021,00015,000MonthlyMonthly Investment Required 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.. TodayToday After 5 years from now After 20 years from now After 15 years from now RR Investors Retail Services (P) Ltd.