Systematic Investing Plan

 

Systematic Investment Plans

A big advantage with pension schemes is that they offer tax incentives. Another investing option you can make use of is what is known as a Systematic Investment Plan (SIP) of open-ended schemes of mutual funds. To compensate for tax breaks, an SIP offers more flexibility and helps you identify funds that suit your risk-return profile. For instance, while saving for pension, an investor in the 25-30 age group could go in for an SIP of an open-ended growth fund. As he approaches retirement, he could shift to an open-ended debt fund. And finally, on retiring, he could choose systematic withdrawal plans.   The advantage that SIPs offer over pension schemes is that the asset allocation keeps pace with your changing risk-return profile. Besides, investing this way offers instant liquidity whenever you require it (on a no-load basis after a certain period) as well as benefits under Sections 54EA and 54EB, which are not available with pension schemes.   Investing in mutual funds through systematic investment plans is much easier and efficient. Investor recommends it as one of the best ways to grow your investment over time.   Will an SIP suit you?   Systematic investing is especially valuable for the investor who wants to get his investments going, but doesn't have a large sum of money to invest. Systematic investing works particularly well if you fear that you might buy a mutual fund at its peak, just before the stock market and your fund's shares head into a slump. It offers a disciplined way to invest a portion of your income at regular intervals without trying to second-guess the market, thereby also protecting you from extreme fluctuations in the market. And, its effect on your investment's growth over time can be nothing short of amazing. This concept is called rupee cost averaging. In addition to helping you organise the process of investing, the SIP offers several important advantages that may boost your chances of achieving your important goals.   You "pay yourself first"   Because it's systematic, an SIP ensures that you attend to your long-term goals before you're tempted to spend the money on a fancy new sound system. An SIP gives investing for your future the same importance as your other periodic payments -- your monthly bills, for example. As a result, you're much more likely to stick with your plan until you reach your goal. It's a great way to both save for three years towards a down payment on a house, or for thirty years for your retirement.   You could reduce your average cost of investing   When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you may reduce your average cost per share over time. This strategy, called 'rupee cost averaging', helps make market fluctuations work for you, and reduces the risk that you'll invest all your money just before a market downturn.   Rupee cost averaging offers its greatest benefit with investments that tend to regularly fluctuate in price, which is why systematic investment plans can be especially effective when used in buying equity funds. The NAVs (net asset value) of these funds can vary widely, but, through rupee cost averaging, an SIP can make this volatility work for you.   However, rupee cost averaging may not work well if the market rises continuously. Also, it is of little use if you are buying units of a debt or money market fund. Keep in mind that rupee cost averaging cannot guarantee a profit or protect you against a loss in a declining market. So, choose an amount you feel comfortable investing under all market conditions.   Do not put off investing   It's easy to delay investing until you believe the time is 'right'. But putting it off means you're not utilising one of the most potent benefits available to long-term investors: the Power of Compounding. When you reinvest your dividends and capital gains, they can add considerably to the growth potential of your investment over time. And the longer you invest, the greater the effect of compounding.   Depending on your risk profile and keeping your goals in mind, identify a few (not more than four) funds that would act as a vehicle for accumulation of wealth. Choose between an SIP of an equity fund and an SIP of a debt fund.           © N.M. Finserv ---- www.nmcomp.com/finserv December 2004