Transcript SIP Concepts Demystified

You must have heard this statement more than n
times now that …
“SIP is the best investment style”
So let’s understand why SIP has emerged as the most
powerful style of investing in recent times through
some real life examples….
There are basically three points that makes SIP such
a strong concept

Rupee Cost Averaging

Power of Compounding

Market timing irrelevance
Let us simplify these terms in next few slides…
Rupee Cost Averaging
To understand this concept more practically look at the illustration below. The SIP investor finishes
with an investment that is worth more than the lump sum investor after six months - even though
the starting price and finishing price are exactly the same. Unlikely but it is true. Check the figures
yourself ….This is the first thing what SIP does; it averages the buying cost automatically.
Lump sum Investor
Month
Unit Price (Rs.)
1
2
3
4
5
6
20.00
18.00
14.00
22.00
26.00
20.00
Total Invested
Total Units Purchased
Average Price Paid
Value of Investment after six months
at current unit price say Rs.20
Amount Invested
Units Purchased
60000
3000.00
SIP Investor
Monthly
Investment
10000
10000
10000
10000
10000
10000
Units Purchased
500.00
555.56
714.29
454.55
384.62
500.00
60000
3000
20.00
60000
3109
19.30
60000
62180
Power of Compounding
This mathematical formula of compounding : FV = PV (1 + r) n is known to all of us but is seldom
understood in terms of investing. Let’s use an example : If you invested Rs. 100000 PV (Present Value) in a
instrument that grows @ 15% per year (the r) for a period of 25 years (the n), its FV (Future Value) will
become
Rs.3291895. Unbelievingly the amount multiplied to a whopping 33 times
Now the let’s see how the same compounding plays in a SIP over a period of time. The table below justifies
all statements of the Power of Compounding. A meager amount of Rs. 1000 per month over 25 years at an
annualized growth rate of 15% accumulates to a humongous number of approximately
Growth rate of 15% p.a.
Rs. 33 lakhs
Total Amount
Saved
Value after 25
years
5,000
1,500,000
16,420,369
3,000
900,000
9,852,221
1,500
450,000
4,926,111
1,000
300,000
3,284,074
Amount saved per month
Market timing is irrelevant
Data Source : Bloomberg
Let’s look at the above analysis in the next slide whether it actually happens …
Time in the market matters; not timing
Data Source : Bloomberg
*CAGR (Compound Annual Growth Rate) -The year-over-year growth rate of an investment over a specified period of time
Now that we have seen the Power of SIP; let’s try to
address this point …
“When SIP works best for us”
Few slides from hereon will explain this more clearly
SIP will work best if following acts are done:
 Start Early
 Invest Regularly
 Invest for Long Term
 Invest in the Right Asset Class
Let’s look at each aspect from a practical angle…
Start Early – Let’s flip around and see Cost of Delay
through “Ram aur Shyam ki Kahani”
•
•
•
•
•
•
Starts investing at the age
Monthly Investments
Returns (assumed) p.a.
Both invest till the age
Total investment
Accumulation at 58
Ram
Shyam
28
48
Rs.5,000
Rs.15,000
15%
15%
58
58
18,00,000 each
350.49 lacs
To catch up with Ram, Shyam has two choices
@ 45% p.a.
Earn on his investment
Rs. 1,25,000
OR Save per month
41.79 lacs
Invest Regularly
Invest for Long Term
Data Source : Bloomberg
Hence longer your SIP
Period
• Lower the risk
• Greater the effect of compounding
• More predictable average returns
Invest in the Right Asset Class
Undoubtedly Equity is the winner overtime…
Now that we have seen why and how SIP can best
work - a question still remains unanswered ….
Can SIP help individuals like you
and me in real life situation to
meet our financial goals ?
Let’s try to answer this question through a simple
case study and see whether benefits of SIP really
work …
Case Study – Real Life Situation
• Assume –
– You are 30 yrs of age; have a wife and kid
– Current Annual expenditure of Rs. 5,00,000
– Retirement expected at age 60 yrs
• More –
– Average prices (i.e. inflation) will rise by 7% pa
– After 30 yrs when you retire, the low risk rate of return will be 6% pa
(Considering you put all your accumulated corpus post retirement in a
bank deposit)
– You will live for more 20 years post retirement
So let’s see what will be the corpus required at the time of your retirement
to maintain the same current lifestyle additionally with enhanced medical
expenses
Your Target
Current Expenditure
Rs.5,00,000 p.a.
Inflated at 7% p.a. for
30 years
Expenditure at the time of Retirement
Rs. 36,00,000 p.a.
Income to be generated post Retirement
Rs. 36,00,000 p.a.
Corpus Required at the
time of Retirement
Therefore to generate
this income every year
post retirement you
need to accumulate a
corpus
Your first reaction
Impossible! It cannot
be achieved.
But then there is a
solution…
So what’s the Solution… Just one simple thing
Subscribe for an SIP of Rs.15,000 per month in a good
diversified equity fund for 30 years and forget it
You still don’t believe it that it can be that simple; let us validate our
conviction with actual returns generated in a equity fund over the years
HDFC Equity Fund
SIP Investments
15 year SIP
10 year SIP
5 year SIP
3 year SIP
Total Amount Invested (Rs.)
2,700,000
1,800,000
900,000
540,000
Market Value as on July 29, 2011 (Rs.)
34,379,093
8,682,024
1,427,405
798,522
Returns (Annualised)*(%)
29.87%
29.64%
18.56%
27.29%
Benchmark Returns (Annualised)(%)#
15.87%
18.42%
8.36%
14.08%
9,967,057
4,737,423
1,110,339
664,982
Market Value of SIP in Benchmark#
From the table it is crystal clear that if an investor did an SIP of Rs.15000 per month in HDFC Equity Fund for 15
years, he would have invested 27 lacs and that would have grown to a whopping number of
as on date; in spite of so many pitfalls in equity markets in last 15 years.
3.4 crore
Still need to think; No pressure but see this
what the delay can cost in the same case study
Time to
Retirement (yrs)
30
25
15
10
Today
After 5 years
from now
After 15 years
from now
After 20 years
from now
Monthly
15,000
21,000
48,000
80,000
Annual
1,80,000
2,32,000
5,76,000
9,60,000
Investment Required
Current Age : 30 years
Retirement Age : 60 years
Retirement Corpus to be accumulated : 8 cr.
Assumed Rate of Return on Investment : 15% p.a.
With every passing year the time to
retirement is reducing and increasing
the burden of investment required. Now
the choice is our whether we want
TO START NOW OR STILL WAIT
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