How Bank systematically cheats
SIP Systematic Investment Plan (SIP)
SIP Systematic Cheating Plan
A special SIP series for members who want to do SIP on an Agents calls. Systematic Investment Plan is not a 100% systematic is what I am going to talk .
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These days SIP Investment is turning into a generic term, few people even think Systematic Investment Plan a.k.a. SIP is Mutual Fund. To give you clarity, “SIP is not an investment” it is a “way of investing systematically/regularly” in an asset class. Even Mutual funds are not investments – Mutual Fund is a term used for investment vehicle, which invests in Equity, Debt or other asset classes.
Read: Magic of Systematic Investment Plan to know what is SIP, how it works, its benefits, SIP Calculator & also check SIP Presentations.
Who Makes Money ?
SIP Investment – 11 Myths
SIP is a great way to invest but there are few myths surrounded. Let me burst few of these through this post.
SIP Investment – Myth 1
SIP in direct equities/stocks is a biggest myth
When you do a direct investment in Equities the first decision that you take is why you are buying a particular stock? Are you aiming a Value buying or a momentum gain? And in both the cases a prudent investor is clear of an entry level and target appreciation when he would enter or exit a stock. So why would he try to do a Rupee Cost Averaging if he has done the fundamental analysis? One would do a SIP in direct equities if he is unsure of growth of a particular company and sanity says one should invest equities when you have done your homework. But if your reason is that you don’t have a lumpsum amount to invest, I have another important point to share.
Second reason is SIP works for portfolios/indexes/mutual funds and not stand alone investments. Imagine what will happen to your investments if that stock price never recovered but now you will say that you will do SIP only in bluechip stocks or index stocks. And I am not surprised by your argument but let me tell you that even couple of year’s good performance of a stock or sector can make it a bluechip & even part of index. Let me share:
Do you know about Zenith Ltd – I am not talking about Zenith Computers. Zenith Ltd was a top steel company & part of Sensex from 1982 to 1992.
Few more stocks (definitely bluechips of that time) that were part of Index Couple of years back – Premier Auto, Arvind Mills, Balrampur Industries, Century Textiles, Hindustan Motors, Indian Organics, Indian Rayon, Mukund, Zee Telfilms, SCI India, GE Shipping, MTNL, NIIT.(If you keep interest in direct equity investments then you can check what happened with these stocks)
What happened with Jaiprakash Associates – it was part of Index till Jan 2012.
Now you can say I would have avoided all these stock & many more that have not performed good. Just would like to share Warren Buffett here “In the business world, the rear view mirror is always clearer than the windshield.”
SIP Investment – Myth 2
SIP is for small investors or salaried guys
Once I was talking to an HNI, and was explaining him about SIP, he was grinning all the time and at last he asked- Do Mutual Funds allow SIP of Rs 5 Lakh per month? Yes why not? It is made to believe that SIP is for Rs 1000 and that’s all. In fact the messages have gone wrong that if you are salaried and have a small disposable income; SIP is the only tool for wealth creation. SIP as we all know is a concept and not limited to the amount of investment. Irrespective of the amount one invests, he is investing in an asset where instead of timing the purchase he is averaging his per unit cost of his investment. The returns that he gets are in percentages and he tends to benefit in proportion to his investment.
SIP Investment – Myth 3
SIP is a fund or a scheme
As I mentioned in starting that SIP are not mutual funds. When I was working for HDFC Mutual Fund, investors called and asked “What’s the NAV of HDFC Top 200 SIP Fund”? Lot of people thinks that SIP is a security or a fund. Basically SIP is a concept and not a fund or a stock or an investment avenue. It is a vehicle to invest. So almost all open ended mutual funds (yes, including debt and money market funds) offer a SIP. Besides mutual funds one can do a SIP in almost every asset class. Do you think a person investing Rs 5000/- every 1st of the month when he gets his salary in NPS is a SIP? Yes it is a SIP investment your ULIP investment & similarly.
SIP Investment– Myth 4
SIP should be started when markets are high and should be stopped when it is low or vice versa
If you know when the markets will be high or low why are you doing a SIP in first case? SIP is a method where you tend to average the cost of investment through the volatility that is built in the price of the asset in which you are investing. So when we say something is volatile it means that it will have ups and downs. So if you play only when it is “up” or “down” how do you expect that the concept will work for you? SIP works when you give it time, whether the time is smooth, breezy or cyclonic. I know it is tough to invest when markets are bad, but here comes the Financial Behavioral aspects of disciplined investing. (Read: Do you really understand SIP)
SIP Investment– Myth 5
I can withdraw money entire from ELSS after 3 years of SIP
It is true that you can withdraw the money in ELSS after 3 years, when you invest in a lump sum. But in case of a SIP each installment is a purchase transaction and each of these installment is locked for 3 years from the day it is invested. It works on the First-in First-out (FIFO) method. So in case you wish to withdraw entire amount you invested in 3 years through SIP, it will take 6 years. Be clear of it and then take a decision to invest.
6 Additional SIP Investment Myths by Anil Kumar Kapila (He is an avid follower of TFL; and always try to help other reader by solving their personal finance queries.)
SIP Investment – Myth 6
SIP is a magical prescription for success
Many readers after reading the Magic of Systematic Investment Plans get the wrong impression that an SIP is a magical formulation that works irrespective of any other criteria. It is true that SIPs make more money even if the sensex goes nowhere over a period of time. It is also true that you can expect to make some money even if you are investing via SIP in an average mutual fund. But it must be realized that no investing strategy is immune to the kind of collapse that the stock market witnessed in 2008-2009.
An SIP does not guarantee returns or positive returns. If you opt for an SIP in a falling market and the market continues to fall as it happened last year, then your investment will suffer a loss on the whole.
The choice of the fund, the tenure of the SIP and the period of investment have a bearing on your overall returns. SIP works on the simple principle that you get more units at low NAV and less units at high NAV. Over time it evens out. It works best when the market is in the doldrums. Unfortunately, during this time most investors panic and terminate their SIPs in disappointment.
SIP Investment – Myth 7
SIP gives better returns than lump sum investment
Just because SIP is considered to be the best way of investing in a mutual fund does not mean that it always gives you the best returns. If you make a onetime investment when the sensex is at its bottom, then lump sum investment will perform better as compared to carrying out an SIP by spreading the investment over a period of time. SIPs work to smoothen out the volatility in the medium term. Over the long run, in a rising market in a growing economy like India, lump sum investing will always out perform an SIP.
However, we should not be comparing returns of SIPs with lump sum investing. Both serve different purposes. In reality investments are made at various points in time and it is not possible for anyone to know the top or the bottom of the market. Moreover, most small investors do not have the financial capability to make large lump sum investments. As soon as you decide to invest lump sum amounts, you are instantly a host to market timing.
If you have strong stomach and don’t panic on seeing your money evaporating in the short term, you can definitely try your luck at lump sum investing. But if you are a normal investor with a comparatively low risk appetite, it will be better for you to stagger your investments via the SIP route.
SIP Investment – Myth 8
There is a right time for SIP investing
Many investors are always trying to time the market. They do not understand that it is time in the market not timing the market that is important. The most common question of the investors- Is it the right time to start SIP? Obviously the correct answer- All times are good times for starting SIP.
SIP Investment – Myth 9
I cannot miss my SIP dates
You must always ensure that sufficient funds are available on the SIP date in your bank account. SIP is entirely at your free will. If for some reason you are not able to maintain balance in your account for the SIP it simply means that you will miss one SIP but you will not be penalised for that from asset Management Company. (you can check what your bank charges ) Your SIP account remains active even if you miss one SIP date but after 3 miss it get cancelled.
SIP Investment – Myth 10
I cannot make lump sum investment in a fund where my SIP is running
Some investors think that they have to maintain separate accounts for SIP investments and lump sum investments in the same fund. SIP is just a mode of investing in a mutual fund. You can always make some lump sum investments in a fund in which your SIP is running. There is no need to maintain separate accounts.
SIP Investment – Myth 11
SIP dates are important
Many novice Investors feel that SIP date plays an important part in their SIP returns. SIP date has no significance in long term. It is just a date for your convenience.
Mutual funds must launch direct plans and offer higher NAV MUTUAL FUNDS MUST LAUNCH DIRECT PLANS AND OFFER HIGHER NAV
The latest round of mutual fund reforms that the Securities and Exchange Board of India (Sebi) has announced has generally been welcomed in the media and by investment analysts. The new rules could re-vitalise the mutual fund industry and create an incentive for fund management outfits to expand to smaller cities and towns. However, there's no doubt that the price of all these will have to be paid by investors. Funds are going to be more expensive than they used to be by a margin ranging from 0.1% to 0.3% a year. Apart from this, investors will also have to bear service tax on at least some part of the expenses that are charged from them. This is undoubtedly a negative. It hardly needs to be pointed out that higher expenses are never a good thing for investors.
However, I have no hesitation in saying that on balance, the current round of reforms are a positive force and the higher expenses are a justifiable side-effect of achieving some desirable outcomes. The main point here is that higher expenses are contingent upon fund management companies successfully expanding their reach to a greater proportion of the country's population. It does mean that if a fund so expands its reach, then its existing investors will have to pay some of the cost of expansion to smaller cities.
On the face of it, this looks like a sort of a subsidy charged to investors from larger cities. This is not different from similar cross-contributions in other areas. For instance, banks' agricultural and other priority sector business is subsidised by more affluent customers. In life insurance, longer-lived customers implicitly pay for less healthy ones. There are many more examples like this. No financial service, probably no business, runs on the basis of charging from each customer precisely what that particular customer costs.
Having said that, there is now greater responsibility on Sebi for ensuring that fund companies live up to the task that they are charged with. The better economics of the business must contribute to a genuine broad-basing of the business. This will mean that AMCs, specially the larger ones, will have to spend more on business development in the real sense of the word; and Sebi will have to make sure that they do.
Another way in which costs can be kept under control is by making sure that Sebi's new direct plan initiative meets with a broad response. The idea is: AMCs should launch separate plans under various funds which can only be bought directly by investors without going through distributors. Since distribution costs get greatly reduced, these plans should have lower expenses. They will thus have a different (higher) NAV than the distributor-sold plans and thus higher returns.
According to what Sebi has said so far, it appears that AMCs are under no obligation to launch direct plans for every single fund. On the other hand, it's very likely that AMCs will be under pressure from distributors, especially large and powerful ones like the banks, to not launch direct plans. This is something that the regulator and even the media will have to guard against. AMCs must launch direct plans for their equity and hybrid funds and the expense levels of these funds must genuinely reflect the absence of distributor remuneration.
Sebi's new regulations begin a new phase for Indian mutual funds. The regulator has made clear its intentions of treating higher expenses as an incentive to create a new kind of fund industry, which will ultimately benefit the investor. As in all new regulations, there will be weak points that no one could have visualised beforehand. However, it would be good if all stakeholders can appreciate the underlying spirit of the changes and work towards genuinely expanding funds. It would conversely be very bad if the usual suspects set about to figure out loopholes and ways to game the system.
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