Jagoinvestor

March 5, 2009

Magic of SIP in Mutual Funds , Part 2

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 Systematic Investment Plan.

SIP - Systematic Investment Plan

So , We have that same last example where 1,00,000 was invested over 2 years using Systematic Investment Plan 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 Systematic Investment Plan 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 Systematic Investment Plan 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 Systematic Investment Plan 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 Systematic Investment Plan. 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.

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Asheesh
Asheesh
8 years ago

Hi Manish,
Recently I read couple of articles yours, great thought and imagination in all your analysis .. big financial institutions.. don’t think the way you are articulating. keep it up, I am subscribing too 🙂
In context of article, need to ask your view, as hell lot of mutual funds are in market, can we take IV ratio as benchmark for selection of fund ( I personally do not like ratings), if yes what should be period of consideration for decent comparison

kahnu charan sahoo
kahnu charan sahoo
9 years ago

Hi Manish,

I am investing in SIP since 1 & 1/2 yr and my portfolio are.

FRANKLIN INDIA BLUECHIP FUND (G) Rs 1000 PM
UTI OPPERTUNITIES FUND (G) Rs 2000 PM
ICICI FOCUSED BLUECHIP EQUITY REGULAR PLAN (G) Rs 2000 PM
HDFC TOP 200 (G) Rs 3000 PM.

Please advise whether I should add anything more or any reorientation is needed.

Thanks
Kahnu

RBR
RBR
11 years ago

Hi Manish,

Its very interesting to read your articles as it is not biased and help to understand the financial stuffs easily. Currently I am reading you book (ordered from flipkart and surprised to see the book in my hand very next day after I ordered:-)). I am planning to go for SIP for my child ( 8 months old). As per my friend suggestion like to go for HDFC Children Gift fund (rather than HDFC top 200 or HDFC Equity). My question is

– Is it actually a SIP mode of investment?
– Is this product good to go for 18 years of period with 5k investment every month (Equity Oriented I plan to go for)? As it has free term insurance I doubt whether my money will again consumed for term insurance (I already have term Insurance).
– Is there any other good SIP product you may suggest

RBR
RBR
Reply to  Jagoinvestor
11 years ago

Thanks Manish. But the HDFC financial planner advised that in mutual fund, there are allocation charges on the investment I make. But in ULIP there are only allocation charge on premium and no allocation charge after 6th year (fund management charges). Can you please help me out – whats the actually benefit in going for mutual fund rather than ULIP?

binu
binu
12 years ago

dear Manish,
from what i read in all the above materials, my understanding is this.please tell me if i am right/wrong.
I f i invest in mf through sip monthly and sell everything[redeem is the word ,right?] after 3 years,then the money i invested at start will do business for 36 months,money invested at 24 months do business for 12 months and money invested at 35 months is exposed to market only for 1 month and so on..right?
… which means total money at end of 3 years if lumpsum deposit at is made initially will be definitely much higher at end of 3 years if markets rise…. and the return for money deposited through sip will be comparitively lower at end of 3 years …right?
And if markets slump,then sip and lumpsum make losses,but loses of sip will be lower than lumpsum due to lower exposure time in falling markets….is my understanding currect sir?…thanks

R SIVA PRASAD
R SIVA PRASAD
12 years ago

Hi Manish,

Thank you veru much. I will try to control my self.

Siva

Siva Prasad
Siva Prasad
12 years ago

Hi Manish,

I started SIP in Nov2011 and SIP date is 7th of every month in Funds India.com
But I paused the SIP and I myself purchased through Additional Investment instead of SIP. Because, I do not know what will be market on 7th of every month, and so I observe the market and purchase when the market is down.
Is it right way? Or I have to continue the SIP on same date irrespective of the market. Please advice.

Thank You
R Siva Prasad

Pritesh
Pritesh
12 years ago

Hi Manish,

I have few queries regarding investment in MF (except ELSS) through SIP :

1. While starting SIP with any scheme do we have to specify the horizon (i.e. No. of years) of investment?
2. If I am not wrong different MF schemes comes with different lock in period.
3. Let say If I start SIP in one MF scheme for 3 years time period : Jan-2008 to Dec-2010 (36 installments). When should I redeem my investment so that
I don’t hvae to pay any tax on earned amount. For example, If I have invested Rs.36,000 (Rs. 1000 per month) till December-2010.
The value of the investments are:
Jan-2011 : 38000
May-2011 : 37000
Dec-2011 : 38500
Jan-2012 : 39000
How much tax I would have to pay if I redeem my investment at any time mentioned above?

Thanks In Advance. 🙂

Regards,
Pritesh

Kharabela
Kharabela
12 years ago

Hi Manish
Can you suggest me good MF fund for long term (with 80C).
Amount: 4k per month.

Thanks & Regards
Kharabela

SK Sharma
SK Sharma
13 years ago

Hi Manish,
I read your article on P/E ratio and how to get benefited by it. ‘Frankline dynamic PE ratio fund of fund’ follows the same philosophy as you have mentioned but its return is not better than diversified mutual fund. In fact, even balance fund like ‘HDFC Prudence fund’ has not only performed better than this but has protected downside also better than this. If a SIP in a good diversified fund or in a balance fund like ‘HDFC Prudence fund’ can give better performance, then why to take extra pain and devote extra time in monitoring Nifty PE and acting according to it. On paper, the philosophy mentioned by you looks good but it has not given better return even after taking extra time and effort. Pl. explain this.
Thanks and regards.
SK Sharma
Mumbai.

subrata manna
subrata manna
13 years ago

thanks 4 this goooooooood suggestion.

subrata manna
subrata manna
13 years ago

gooooooooooooooooood suggestion for concious investors. it has helped me for SIPinvestment& cleared abt sip.

Sweta
Sweta
13 years ago

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)?

Anand
Anand
13 years ago

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.

trackback
14 years ago

[…] like to invest Rs 5,000 – 7,000 a month through SIP to build a corpus for my child’s education in 20 yrs from now. I think I will need around 20 lakh (which will […]

trackback
14 years ago

[…] looks at the NAV to find out if you are in profit or loss , then you are not doing right thing . Mutual funds investing is very much close to Share investing where you track the instrument , see how its performing , […]

trackback
14 years ago

[…] Read continuation Part 2 of this post here […]

Balbir
Balbir
14 years ago

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

Sylar
Sylar
14 years ago

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.

Manju
Manju
Reply to  Jagoinvestor
13 years ago

Hi Manish,

I am a newbie in MF. Regarding the first question “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”, please elaborate!

I am reading your articles, it is very informative. Good work!

Thanks,
Manju

Manish Chauhan
Manish Chauhan
14 years ago

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

Raghu
Raghu
14 years ago

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