Eighth International conference 0n January 3-5, 2007 at New Delhi

A Systematic Investment Plan in Time

A SIP In Time...

A systematic investment plan is the thing for you if you want to get into a regular investment mode. You need to remember some little details to get it right, says Arnav Pandya.
ONE of the biggest moves towards a regular investment process has been the adoption of systematic investment plans (SIP) while putting money into mutual funds. To make it work, one would do well to keep in mind small issues that could crop up.
A SIP is a mode of investment where a regular sum gets invested each month by the investor in a particular scheme. This enables one to ensure that there is a rupee cost averaging experienced and hence, the risk of onetime investment is reduced.
The way in which a SIP actually works for investors is that when the market is ruling high and consequently, the net asset value (NAV) of the scheme is high, the number of units allotted is small for a specific sum of money. When prices are low, the investor is able to get a higher number of units into his kitty for the same sum invested.
This brings some regularity into the process. Apart from this, there is also the possibility of the waiver of the entry load in equity schemes when there is such a SIP investment by the investor. However, the situation will vary depending upon the way in which the investment is made.
There are different ways in which an investor can ensure that a certain sum is invested on a regular basis. Let’s consider each of these ways and their implication. One of the ways that the investor may adopt would be to ensure that each and every month, there would an investment or a diversion of a sum of, say, Rs 2,000 in a particular scheme. This money could be available at any time of the month and hence, the target would be to ensure that there is a regular inflow each month.
This would achieve the objective of having a regular investment of a fixed sum into
the scheme but it might not be helpful from the systematic investment point of view because the money could be available at different times during a month.
Sometimes, at the end of a month or even at the beginning of a month, the investor
may even put the sum of two months in the scheme at one go. This achieves the overall objectives but gives a different risk perspective to the particular investment.
The next option is the idea of putting Rs 2,000 each month on a particular date of the month. This is done by the investor on his own accord and on a regular basis. This meets the objective of regular investment and that too, at a particular time. It also leaves the investor with the option to not contribute mandatorily in case there is some problem in a specific month with cash flow. However there is a cost that one has to pay for this kind of self-help. This is in the form of an entry load that the investor will incur when they actually put their money into the schemes.
These entry loads average around 2.25% in the case of equity-oriented schemes and these are an important factor in the final analysis because they are a direct drag on the final return of the schemes. The investor should be looking at saving cost as and when this is possible.
This is where a SIP process followed with the mutual fund could make a difference. Most mutual funds call for cheques for a specified number of months when one joins the fund and several of them also ensure that when an investor goes in for such a systematic investment, there is no entry load charged on these investments. This results in an additional saving for the investor.
At this point, one has to note that the idea behind undertaking such an investment is not to save on the entry load but to get an element of regularity in the investment process. The saving on the load should be considered as a bonus.

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