A systematic investment plan, as defined by various investment experts, is an investment vehicle that allows the investors to pay equal amounts at regular intervals to the mutual fund scheme of their choice.
2. A systematic investment plan, as defined by various investment
experts, is an investment vehicle that allows the investors to pay
equal amounts at regular intervals to the mutual fund scheme of
their choice. It is quite similar to the recurring deposit schemes that
banks offer; the only difference being in the rate of return. While
recurring deposits have fixed rate of return, say close to 9%, returns
in SIP may vary from 10% to 35% and beyond.
3. Calculating returns on an SIP is a tedious task. But, MS Excel
comes as a handy solution to the users who want to know what they
will get at the end of the term of the investment. To calculate returns
on SIP, start inputting a sum of $100 from row 1 to row 12. As the
cost of buying SIP varies (because of fluctuation in cost price), a
number of units allotted changes accordingly. So, you get a different
value under the head 'Market Value' each time. The total of all the
market values (= NAV * no. of units) is the final amount you
receive at the end of the SIP plan.
4. SIP takes time value of money in the calculation. Money tends to
lose its value over a period due to rise in inflation. So, to know how
SIP fares better than other investment alternatives, you can compare
IRRs of these. To understand IRR, let's first understand NPV.
NPV stands for Net Present Value. NPV tends to decrease at the
same rate as that of inflation. It is believed that NPV may reach the
value zero over the course of time. So, the rate at which NPV
becomes zero is IRR.
5. The formula for calculating returns on SIP goes something
like this:
NPV = NPV of Cash Flow in investment{Cash Flow / (DR
+1)^n}
NPV = net present value
Cash flow = cash value of the investment alternative
DR = discount rate (mostly, inflation rate)
n = no. of years
6. Return of SIP investment is calculated using IRR function. If you
compare IRR of a recurring deposit where the rate of return is
constant, with that of SIP, you will find that SIP has lower IRR than
RD. That is why, return on SIP is mostly higher than RD for a given
period.
7. SIP has higher returns than fixed and recurring deposits. But, it is
subject to a variety of loads as well as market risks. However, if
market risk is of concern, then the investor can go for a variety of
SIP plans that invest more in debt markets than the market-linked
equity. So, if you want to enjoy the benefits of the volatility of
markets without exposing too much to the risk, then you can choose
SIP over company stocks for investment.
To conclude, if you are willing to take a calculated risk, you must
go for Systematic Investment Plans. All fund houses provide SIP
returns calculators to find how much money you will be making
from your savings.