Showing posts with label SIP. Show all posts
Showing posts with label SIP. Show all posts

Friday, November 9, 2018

Which is Better SIP or SWP?

Investors frequently ask me, "Which is Better SIP or SWP?". In short, mutual funds create the two products for entirely different situations. A SIP creates wealth. Whereas an SWP breaks down an existing corpus into small, regular payments.


Which is Better SIP or SWP - Feature Image


The dilemma is similar to, "What is the difference between Dividend and Growth Fund? Which is Better"? The answer is also the same. Dividend or regular income plans suit a person who has a big initial corpus and wants to live out of it. Regular income plans invest in interest paying investments like bonds. On the other hand, a growth fund is meant for creating a corpus or wealth.

Before we go deep into the differences between the two let me first explain what is a SIP and an SWP briefly.


Which is Better SIP or SWP? - Meanings

The word SIP stands for 'Systematic Investment Plan'. A SIP is a plan for making small investments in a mutual fund scheme at regular intervals. Usually, the interval period is a month. Therefore a SIP is only a commitment to make a regular and periodic investment into a particular mutual fund scheme. However, it is not a type of mutual fund or investment instrument.

SWP stands for 'Systematic Withdrawal Plan'. It is a scheme for converting a certain lump sum fund or money into a stream of small payments over a certain period of time. Again it is only a scheme designed by a mutual fund and not a separate type of mutual fund or investment instrument.

I tabulate the differences below:


I list below links to a few interesting articles relating to mutual funds you may like to read:

Conclusion

I conclude that a SIP and SWP are antonyms. While a SIP is an attempt to create wealth, an SWP is a scheme to distribute a lump sum of money into an annuity. I hope I was able to set at rest the dilemma, "Which is Better SIP or SWP"?

Friday, June 16, 2017

Is Daily SIP Superior to Monthly SIP?

tuning fork-calander-waves

Actual Question


Is a daily SIP of Rs. 2,000 in a mutual fund a better idea than a monthly SIP of Rs. 60,000?

Dear Friend!

You have asked a very interesting question.

The key concept behind a systematic investment plan (SIP) is to even out the price fluctuations. Since timing the market is extremely difficult, wise people had devised to achieve the next best thing, the ‘Dollar Cost Averaging (DCA)’ through SIP.

Now the focus shifts to your question regarding whether it is ideal to achieve DCA by investing daily or monthly.

Of course, it goes without saying that as the frequency of investing increases better averaging is achieved.

If this is so, why once a day?

Why not every hour?

So it is all about the question of reasonableness.

One has to strike a balance between the improvement in results and the time and effort involved in making investments. Obviously there is an opportunity cost involved for the time and efforts expended!

And finally in real investing, where we are talking about long times of two to three decades, it really is not going to make much difference whether you are investing through SIP on a daily basis or monthly basis.

To conclude in the real world of true value investing monthly SIP is adequate and one need not take the trouble of investing daily to achieve better dollar cost averaging.

Related Articles:


Thank you,

With Best Regards,

Anand




Saturday, March 18, 2017

Is SIP better than a Fixed Deposit?

Actual question:

How is SIP investment better than an 8% interest rate fixed deposit?

Picture shows happy frog wondering whether a SIP or Fixed Deposit is an attractive investment
Picture shows happy frog wondering whether a SIP or Fixed Deposit is an attractive investment

Answer:

Dear Friend!
Thank you for raising a serious and thought provoking question.
Before we address your core question, let us get a few fundamentals cleared. All SIP investments are not better than an 8% fixed deposit. For SIP is not class of investment or a certain product. SIP simply means a regular and disciplined investment habit. Therefore, a SIP in a debt mutual fund is definitely as poor an investment as an 8% fixed deposit when growth is concerned. In order for the performance be better than a fixed deposit, the SIP shall be in a 100% equity growth fund.
Now let us address you fundamental question. The relative superior performance happens because of two important reasons as follows:
History proves that stocks yield a better rate of return in the long term. The minimum average returns yielded by the S&P BSE Sensex is 15% - which is almost double the fixed deposit rate in question.
The miracle of compounding working its magic at an enhanced rate yields unbelievable results.

Let us go to the resource future value of investment calculator. An investment of 100,000 for 40 years in a product that yields 15% per annum compounds in to 38,134,227 at a maximum inflation of 5% per annum. Whereas a 8% fixed deposit will yield 1,691,497 only! A more than 25 times poor result!
The conclusion is quite obvious is not it?
Thank you,
With Best Regards

Anand

Thursday, February 16, 2017

Self-Investment or SIP?

Picture Shows investor's dilemma of Self-Investment or SIP?
Picture Shows investor's dilemma of Self-Investment or SIP?

Actual Question:

As an investor looking for the best returns, should one learn fundamental analysis & invest in stocks or identify good mutual fund schemes and invest via SIP?


Answer:

Dear Friend!
The answer depends on the investor’s interest in learning and making investments on his or her own and to invest time for this purpose.
Mutual funds (MFs) through are the best for those who do not like or do not have time or both for making their own investments. But there are a few fundamental problems with MFs as follows:
  1. They bring out many schemes with exotic names under categories like income funds, growth funds and so on often confusing the investors.
  2. They keep on churning the portfolios to justify the managing fees charged and the money managers in turn churn the portfolios to justify their salaries causing a lot of harm to the investors.
  3. They charge heavy management fees ranging from 2–4% per annum - which is unjustified.

For long term wealth creation an investor simply choose a well diversified equity index fund of a very large fund house that is all.
Alternatively, an investor can purchase Exchange Traded Funds (ETFs) every month that tracks any popular index like S&P BSE Sensex or NSE’s NIFTY 50. The advantage is:
  1. Investor can simply buy the ETFs herself on any online trading platform implementing self disciplined SIP.
  2. Fund management charges of a SIP are only in the range of 0.50 to 0.60%


Only important thing is that once invested the investments should simply be forgotten for 20 to 30 years.
If an investor wants to invest himself or herself one shall learn investing first and become a value-investor.
Reading the book “The Intelligent Investor” by Benjamin Graham is the first step recommended.
Suggested Further Reading:

Thank you,
With Best Regards

Anand