Mutual Funds

Is smaller SIP safe in the long run?

Systematic Investment Plan (SIP) has remained the buzzword in the Indian market when it comes to mutual funds. People often question if SIP makes sense only in the long term and are concerned if they are safe over the short-term. In this blog, we seek to see if smaller SIPs are safe, but before that, let’s begin with the basics.

What is SIP?

SIP is an organized and disciplined way of investing regularly in a mutual fund. Middle-class people particularly do not see a huge sum of money for making investments and thus rely on something where they can keep aside a smaller sum. In SIP, you tend to keep aside a fixed amount every month, which is invested in the fund of your choice that matches your risk appetite and generates enough return at the defined risk level.

Now the most important question –

Is SIP safe?

SIPs are a very safe means of investment.

You must be wondering, can I say so?

Very simple, if you are investing a hefty amount on one fine day, your returns may turn negative if the market condition is bad.

For example,

Assume you invested Rs 5 Lakhs on November 7, 2016, when the S&P BSE Sensex was 27,459. On November 8, 2016 – demonetization happened, and the market started to crash. In this case, you will be stuck with negative returns until market rebounds. To be sure that you invest in time where such shocks don’t occur is next to impossible given future is uncertain and however good analyst or researcher you are, you won’t be able to predict what lies next.

So what is a safer way?

Simply put a fixed some (a smaller amount) at a regular interval (say monthly, quarterly, fortnightly, or weekly) irrespective of where the market is. This will help you average out your cost of investment.

In the previous example, assume you invested Rs 5 Lakhs in 5 months with Rs 1Lakh per month on 7th day of every month started November 2016.

What is the result?

Your investments look like –

Table 1

Tarrakki Research Table

Source: BSE India; Tarrakki Research

If you see, your investment of Rs 5 Lakhs in 5 months via SIP mode turns positive.

On the other hand, if you invested Rs 5 lakhs in a lump sum, due to demonetization when the market corrected, it would not have generated positive results immediately and would have reduced to as much as Rs 4.69 Lakhs on November 21, 2016 (when the Sensex fell sharply and reached 25765.14).

Can SIP be stopped?

Yes, very much. All the SIPs can be stopped, unlike fixed deposits and recurring deposits. Also, after stopping your SIP, you have the flexibility of either withdrawing your money or continue with the investment as is. At Tarrakki, we offer some of the very cool features such as Stop SIP, Add more funds to existing folios, set up SIP on multiple days of the month after activating the first SIP in a folio and many more – all this can be seen in one place and in one app.

Download Tarrakki from iOS Appstore and Google Playstore today.

Can SIP amount be changed?

Increase the SIP value (from say Rs 1000 per month to Rs 2000 per month) is called as Step-up SIP and reducing the value is known as Step-down. But all mutual funds do not offer this process, and even if it provided, the process remains complicated.

Thus, it is advisable to start a new SIP with the additional amount for which you are looking to invest in the same fund.

Is there a lock-in period in SIPs?

Not really, until and unless you are investing in the Equity Linked Savings Scheme (ELSS). ELSS is a type of equity fund that provides for tax benefits and comes with a lock-in period of three years from the date of investment.

Is there an exit load in SIP?

Exit load is the fee that is charged by the fund house when you redeem your investment before a specific time (365 days generally in case of equity funds and a little lesser in case of debt funds and an index fund. For some equity funds, the exit load is greater than 365 days. Please refer to the fund prospectus or Tarrakki app for more information). An exit load is applicable only if you redeem your SIP investment before the said period.

For example,

In the Table 1, your SIP started on November 7, 2016, and ended in five months on March 7, 2017. So if you redeem any money –

  • Before November 6, 2017, you will be charged an exit load of 1%.
Number of Units 18.2 (refer to table 1)
Unit value on November 6, 2017 Rs 33731.19
Total Value = 18.2 x 33731.19 = 613907.7
Exit load (1%) = 1% x 613907.7 = 6139
Amount given to investor = 613907.7-6139 = 607768.6
  • On January 8, 2018, you will be charged exit load on Rs 2,00,000 because your installments of Nov-16, Dec-16 and Jan-17 will complete 365 days and thus will not be applicable for the load

Remember, in case of SIP, each SIP installment is treated as a separate investment.

Are SIPs good for long-term?

Yes, definitely. I would suggest all the SIPs that are in equity and equity-oriented funds should be for long run only. By the long run, I mean over 5-7 years. This helps you in averaging out your cost in the right manner, helps in wealth creation, provides with the benefit of compounding.

To conclude,

We can say, SIPs are safe – be it short SIP or long-term SIP. However, you need to be cautious with short SIP if you have equity funds as equity takes time to show the potential of wealth creation.

Start your SIP today; create your free account with Tarrakki.

SIP karo, Tarrakki karo!

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