Successful investing does not require an
extraordinary IQ; it simply requires immense measures of discipline. The
‘Systematic Investment Plan’ or ‘SIP’ is the regimen through which the value investor builds the character, which is one of the vital
ingredients for triumph in investing.
Meaning
SIP is a regimen, not a financial
instrument like a share or bond.
Mutual funds have created so much of hype and publicity around the term
‘SIP” that it has acquired a unique status and existence, that many people
think that it is an investible financial instrument. SIP is a contract or
commitment with a mutual fund to subscribe or invest a certain sum of money in
a particular scheme or fund. For example I can decide to invest Rs.1000 every
month in HDFC’s equity fund styled, ‘HDFC Top 200 Fund’. There are many types of funds or schemes like
equity or growth funds, debt or income funds and so on but our present topic
does not permit us to delve into it and so lets leave for a separate article.
A systematic investment plan need not
necessarily be about investing with a mutual fund. If you are able to invest a
certain sum every month in shares or bonds or exchange-traded funds regularly
with discipline, this is also a SIP.
Frequency
of investment
SIP requires a periodic investments but
technically the period could be any reasonable time interval such as a month,
quarter or six months. However in practice, usually it is very month, which is
quite reasonable and convenient.
Minimum
investment amount
The minimum investment amount needs to be
decided by the investor based on ones financial goals. To create a significant
wealth over a period of about 40 years or 480 months (Ideally one should start
investing at 20 years of age and enjoy the fruits at 60) the amount should be
appropriate. In m they opinion about Rs.10000 to 20000 should be invested every
month.
Following graphic depicts the net wealth
created for various investment amounts, after taking into account inflation at
10% per annum, which is very high and an expected return of 15% per annum,
which is quite reasonable:
As for the minimum investment amount from
the perspective of making SIP affordable, funds have brought it down
drastically in India. I
hear that it can be as low as Rs.50 a month (UTI Retirement Benefit Pension Fund}. I am
told that ICICI Prudential also offers a SIP of Rs.50.
Duration
of SIP Investment
Finally, the last and crucial golden rule of
SIP, which none emphasizes is that a SIP shall be kept alive uninterrupted for
very, very long time periods like 40 years. Only then the ‘Miracle of Compounding’ will have an
opportunity for work for you and make you a rich and wealthy individual
irrespective of which financial class you presently fall in.
To conclude, every individual, including the
one from the most humble background and means, can become a ‘Crorepati’ or a
‘Millionaire’ through disciplined and long-term ‘Systematic Investment Plans
(SIPs).
