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The Power of Rupee Cost Averaging or SIP!

Scrolled through social media and found something named “SIP” as an investment option?

Got a chatter around your friends regarding SIP/Mutual Funds, but you are clueless as to what this is all about?

Let us delve into the intricacies of Rupee Cost Averaging. Whether you're already familiar with the concept or stepping into the realm of SIP for the first time, this article aims to provide insights that deepen your understanding and clear the basics surrounding Rupee Cost Averaging.

Problem Statement

There was a problem statement for the investors in the early 90’s, they wished to invest regularly but did not want to go through to the tedious process of paperwork every month.

They were even ready to provide annual Post-Dated Cheques as well. However, the industry did not provide this option at that point in time.

Well as they say Necessity is the mother of invention.

And a baby was born by the name SIP.

It all began when

SIP was introduced in India in early 1993 by Franklin Templeton Mutual Fund house.

The liberalisation era of the Indian economy brought significant changes in the financial market, including the entry of private sector mutual funds. These mutual fund houses recognised the need to offer a disciplined and regular investment option for retail investors like us.

Currently, Indian Investors invest approx. 17,000 Crore through SIP. The number of SIP Accounts is at an all-time high of about 7.30 crore SIP accounts.

And it is just the beginning of the Indian Dream.

Meet Mr. SIP

SIP is a mode of investment and not a vehicle for investment.

SIP invests your money in financial markets, typically in mutual funds.

Instead of putting a big chunk of your savings into the stock market, SIP takes a small, fixed amount regularly, usually every month.

SIP could be in an equity fund, debt fund, dynamic fund (Mixture of Debt and Equity) or any other category of mutual fund.

How does a mutual fund work?

A mutual fund is managed by a SEBI-registered company called AMC (Asset Management Company) that invests in various financial instruments such as equity, bonds, gold, etc. They aim to provide decent returns to their investors while keeping the risk level in check. 

Example: ABC AMC offers a mutual fund scheme named “ABC Large Cap”. It has 100 people who are investing Rs. 1000 each monthly, totalling Rs. 1 Lakh. Each investor will get 100 units of face value Rs. 10.

Now, ABC AMC decides to invest 10 per cent each in 10 different companies.

If the market moves up by 2%, your portfolio shall increase by 2% and vice-versa.

Mutual funds earn a small cut by the name-called expense ratio. These are usually in the range of 0.50% to 2.25% for equity funds. They are deducted from your portfolio regardless of their performance. Yes, because they also need to pay their bills.

Why the concept of Rupee Cost Averaging?

Now, you might wonder, why not just put bulk money in when the stock market is doing well? Here is where Rupee Cost Averaging comes into play.

Imagine you invest Rs. 1000 monthly in a mutual fund through SIP.

First Month of your investment

Mutual Fund unit price

Investment amount

Units credited

10

1000

100
 
In Month 2 of your investment, the markets have gone down a bit. Now your Rs. 1000 shall buys more units. 

Mutual Fund unit price

Investment amount

Units credited

9

1000

111.11

Month 3: The unit price jumps up a bit, thus your Rs. 1000 shall buy fewer units.

Mutual Fund unit price

Investment amount

Units credited

11

1000

90.91

In case of SIP, you buy more units when the markets are low and less units when the markets are at high.

This is what we are supposed to do right in stock markets?

SIP automates the process.

Over time, your portfolio shall have units purchased at various price points. Therefore, the price at which you purchased the units shall neither be the highest nor the lowest. It shall be an average.

In the long term, the market goes up and so does the value of your complete portfolio.

This is the power of Rupee Cost Averaging.

The Power of Rupee Cost Averaging or Systematic Investment Plans (SIP)

The two most important concepts in investing are

  • Discipline and
  • Automation of your investment decisions

The above two concepts will create a magic called “Rupee Cost Averaging”

If Rupee Cost Averaging is applied from a young age, then it is an icing on the cake.

SIP is one such product in the Indian Markets which can apply these concepts directly without any fuss.

SIP Kyun? (Why SIP)?

Sensex has provided a return of about 12-13% since inception. But this journey had its highs and lows as well.

It is during those down moments that we question our decisions about investments.

SIP just helps makes the journey smoother

SIP is ideally suited for long-term investors. It encourages you to adopt a patient, disciplined approach to wealth creation.

They benefit from the power of compounding.

It does not matter whether you start your SIP at the top or the bottom of the market over a longer time. This has been substantiated by a study published by Mint.

However remember, SIP does not eliminate risk – because at the end of the day, it still invests in stock markets.

Convenience and Accessibility

The Jandhan Aadhar Mobile (JAM) trinity had made investment a super easy process to start with. Online platforms have made investing in SIPs convenient and accessible to a broader audience.

SIP is truly for Aam Aadmi of Bharat.

If you are having a demat account, you can literally start your SIP in less than 5 minutes.

If you don’t have a demat account, you can download the MFCentral app  or visit the respective AMC website to get started.

The convenience of putting your salaried account in auto-debit mode results in you living your life on what gets left after savings and not the other way around.

In the end,

The journey of a thousand miles begins with a single step.

The journey of your financial freedom begins with a humble SIP.

I started investing in SIP before 10 years with Just Rs 1000. You can too.

If you don’t know where to start from, just pick up any Nifty 50 Index Fund.

If there is one thing that I would like you to take from this blog. It is that don’t start this process tomorrow or day after or the day after – JUST START NOW.

 

Authored by

CS Anuradha Parmar

CA Parth Shah

What is your take on the matter? Do let us know your feedback

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You can read all the previous blogs here:

http://Refreshingfinance.blogspot.com

Thanks for reading!

Until next time, keep learning.

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