Some days back I had talked about SIP and its characteristics using some examples , you can read it here . Today we will take that forward and see other important things related to SIP .So , We have that same last example where 1,00,000 was invested over 2 years using SIP and without SIP in UNITECH . Can we measure how good our investment is at any point of time . For that I developed a simple indicator called IV ratio which is very simple , Its just the ratio of Your total investment divided by its current Value at any given point .
IV ratio = Current Value / Investment
So if your investment = 10k , has current value of 8k , IV ratio = .8 , If current value is 15k , IV ratio = 1.5
I have plotted a graph of IV ratio in two cases of SIP and NON-SIP . You can clearly see in the graph that , IV ratio for SIP was always more than non-SIP mode . At first , IV ration was declining for both mode , which is fine , because of falling markets , but still For SIP it was high , which means , that you get better returns . then in last part , when markets were volatile , IV ratio for non-SIP was stable , but for SIP it went up , which means that SIP was giving better returns at this point .
Finally SIP mode generated worth of around 42k (IV = .42) and Non-SIP gave around 9k ( IV = .09)
Conclusion : IV ratio is a simple tool to measure the performance of your investment . You can also use it to compare two different Investments mode over a period of time .
Now , let us see some other things in regard to SIP . I have plotted the graph for IV ratio of SIP , and the investment value itself scaled down to 1 . Blue line is the actual growth of investment and RED line is the IV ratio .
Some of the things to Notice here are
1. In the start (till 17-18) Investment was going up , but IV ratio was falling , which indicates Growth in value mainly because of your Monthly inflow in SIP , that means the markets are falling and eroding your investment , but the decrease in value is less than your monthly addition which you make .
2. From 18 payment onwards , you investment and IV ratio both are falling , which means that markets are falling at very high rate and your monthly contributions are smaller than the decrease in your portfolio .
3. from 31st payment onwards , you can see that IV ratio and your investment were going up , which means volatile and sideways market or small upside correction on up side .
At last , you can see that both the value converge to same value of .42 , which is your IV ratio and your actual investment value , Because at this point total investment is 1,00,000 .
Conclusion
IV ratio is the measure of how well your investment is doing in a given market , If its higher than yours friend , you can feel better because your have lost less for your investments . SIP results in higher IV ratio in markets which are not going up too fast . which means apart from fast moving markets on upside it makes sense to invest through SIP only . It protects you from volatility , develops from discipline , and your are more satisfied mentally .
{ 15 comments… read them below or add one }
Dear Manish,
I am reading your blogs since few months and I learnt many things from your blog, thanks for that and whenver I see your any new blog in my Orkut A/c I must read it. And as you suggesting in Mutual Fund most of the times for long term, but I want to know that when we all know that market is very low now and we can get many good stock in cheap rate, then why you are not suggesting for equity direct. But yes if you think that market can fall more further then MF is good option. But though I lost my half of my investment in 2008 but still I like direct market still. So, plz suggest the a price range of good stocks or sectors price at which the investor can invest who like directment and the investment must be periodically(i.e. monthly). And I have some thing I want to ask you but on next post….
Manish,
I guess u had a typo in the article..It should be like this..
IV ratio = current value / Investment
and the way you explains the article is very good. It would be better if you add a good performing Mutual fund and explain in regards of MF as well..
Keep it up.
- Roank
Thanks Ronak
I have made the correction .
Btw , you made a typo with your name at the last in the comment above , that was funny .
manish
hi manish,
suppose each month 10k is investd through SIP it will be 1,20,000 ,
tax exemption will be for 1 lac only
8k will be SIP ELSS tax saver schemes(4k ,4k)
2k will be SIP ELSS non tax saving schemes
in non tax saving scheme locking is not there?
is corerct is any other benifit exist in non tax saving schemes
@Rajan
Ooops . There is some doubt on your side .
ELSS is nothing but "tax saver mutual funds" . So there is nothing like SIP ELSS non tax saving schemes.
Also 1 lac is limit for total 80C . So if you already have 25k in your EPF and 20k in your insurance premium , only 55k is remaining which you can claim no matter how much you invest in ELSS .
Non-ELSS (non tax saving) funds do not have locking period , you can invest today and take money out after 10 days ..
Benefits of non-tax savings is LIquidity
manish
hi manish
how it is plan of Century SIP offered BY BirlaSunlife
which one is better eiteher term insurance or CSIP ?
assume sum assure is 50 lacs
if term insurance 15 k per annum
in CSIP 48 k per annum will give 40 lcas sum assured
but in Term assuarnce , money wont get back any.
in CSIP amount of Fund value + Life insuarance will get
please tell me is it correct ?
–
Raghu
@Raghu
I just glanced through the CSIP , it looks ok .
But still nothing in this world can beat a carefully choosen Term insurance + Term
Also insurance is capped at 20 lacs in CSIP . What is your insurance requirement ?
I would prefer Term + SIP in mutual funds . nothing beats it .
Manish
Manish
Thanks for these lovely articles on SIPs. I am very new to MFs and am planning to start by conservatively investing in either DSPBR Top 100 (G) or HDFC Top 200 (G) via SIP of 1000 / mth. One query that I have about SIPs is that, say, I commit to pay 1000 per month initially for a period of 7 years.
1. Can I stop paying the SIPs at a certain stage ? What happens then of my existing investment. Am I compelled to withdraw or will I continue with the existing share I have in the MF
2. Can I increase or decrease (subject to minimum SIP installment) the installments at any stage within the period.
Thanks again for keeping us enlightened on the fundas of investing.
@Syler
Your Fund choices are good . Make sure you also understand that these equity funds and they are bound to go down if markets crash .
1. SIP is for minimum of 6 months (excluding first payment by cheque) . After that you can stop the payments . No issues . So you can take for 2 yrs or 10 yrs , but stop anytime after 6 payments .
2. No you can not increase or decrease the amount ,There are certain MF who allow this , but in general answer is NO !! .
Manish
Hi Manish,
Can you suggest me good MF fund for short term (1 to 2 years) (without 80c) , I feel dividend option would be suitable. but can you suggest me some MF please.
After reading all your article I know you hate this part but still asking
I might go with 5K per month with SIP for period of 3 years ( but would stop after 6 month if some other needy/greedy thing comes). I will surely check value search before I make decision..
Thank you,
Balbir
Balbir
Not sure what is your risk appetite . For short term I cant suggest Risk funds . What is your return target ? if its 9-10% , better look for debt oriented funds .
If you wish more than 20% in short term and can take risk , go for equity funds . see the list on one of the posts .
manish
IV ratio does not consider the investment period. So it cannot be used to compare the two investments.
The only right way is CAGR. Period.
Anand
Why ? While comparing two things , it definately compares them along with time frame. At any point IV ratio of one investment is compared to IV ratio of another taking into consideration the same time frame .
Manish
Suggest me some high return high risk fun which i can enter thro SIP for 2-3 years.
Amount: 1k/month
Risk apetite: High
Well, my next question doesnt fit here, but is it better to posess gold coins/biscuits from market or better to enter Gold ETF(where i wont have it physically)?
sweta
For mutual funds you should read the current article : http://www.jagoinvestor.com/2010/08/list-of-best-equity-diversified-mutual-funds-for-2010.html
Regarding Gold , it depends what you want, if you want emotional feeling of possesing gold then buy biscuits , if you want it for pure investment and grwoth , then ETF would be better
Manish
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