Smart strategies to make the most of SIPs

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1 Issue Smart strategies to make the most of SIPs The article for this month, Smart strategies to make the most of SIPs, offers tips on how you can harness the power of SIPs to your advantage and maximize the gains from this investment route. Top performing equity and debt mutual fund schemes are highlighted on Page 6 & 7. In August, domestic equity markets were driven by global factors. On 11 August, the People s Bank of China (PBOC), the Chinese central bank, devalued its currency by 1.9%. The PBOC s move rattled financial markets all over the world and the impact was also visible in the Indian stock and currency markets. The Indian stock market, as reflected by the S&P BSE Sensex, fell in excess of 6% during the month. In fact, a fall of a similar magnitude was seen on 24 August alone when the benchmark index fell by close to 6%. Although the market recovered some ground after that, it still ended the month with a sharp cut of about 6.5%. The index of industrial production (IIP) for the month of June expanded to a 4 month high of 3.8%, rising from 2.7% in May, due to an improvement in manufacturing activity. CPI inflation for the month of July slowed to 3.78% from 5.40% in June. Yields on the 10-year government paper went up marginally in the begining of the month as RBI left policy rates unchanged. The yields, however, came off in the later part of the month to end at 7.79% as retail inflation came down significantly for July. RBI has maintained that it is in an accommodative mode and will take a decision based on incoming data. While rates are expected to come down, it remains to be seen if it happens in the September policy review, as the RBI will also take into account external factors, and a rate cut may add to the volatility in the currency market. According to data released by SEBI, FIIs were net sellers in the equity markets for the month, with total sales of approx Rs. 16,877 crores. On the other hand, surprisingly, domestic mutual funds continued to remain net buyers in the equity markets, with total purchases of Rs. 10,533 crores for the month of August 2015.

2 *Returns as on 31-August-2015 :All major global indices ended in the negative territory for the month of August 2015, of which Shanghai composite fell the most by 12.49% whereas Kospi, falling least by 4.53%. Indian benchmark indices, the CNX Nifty and the S&P BSE Sensex, fell by 6.58% and 6.51%, respectively, in the month of August Equity Schemes Top Performers Top 5/Bottom 5 Under Performers Absolute Scheme Name Ret. % (1Y) Scheme Name Birla SL MNC Fund SBI Pharma Fund SBI Small & Midcap Fund MOSt Focused Midcap 30 Fund Absolute Ret. % (1Y) Baroda Pioneer PSU Equity Fund Sahara Growth Fund SBI Magnum Comma Fund SBI PSU Fund MOSt Focused Multicap 35 Fund Sundaram Growth Fund Debt Schemes Top Performers Scheme Name SBI Magnum Gilt-LTP Under Performers Annualised Ret. % (1Y) Scheme Name ICICI Pru Gilt-Treasury-PF 2.43 BNP Paribas Gov Securities Fund UTI Gilt Adv-LTP DWS Inflation Indexed Bond Fund HDFC Inflation Indexed Bond Fund HDFC Gilt-Long Term Plan Tata FIPF B L&T Gilt Fund JPMorgan India ST Income 6.04 *Returns as on 31-August-2015 Annualised Ret. % (1Y)

3 Smart strategies to make the most of SIPs The SIP route is one of the best approaches to investing in Mutual Funds. It is not only safer but an extremely convenient way of building wealth over the long term. Unfortunately, not many investors are able to harness the power of SIPs to their advantage. It has often been noticed that when the markets go down, many small investors stop or terminate their SIPs. This, in fact, defeats the whole purpose of investing through this mode. By stopping the SIP during a market slump, the investor forgoes the chance to buy more units at a lower price, which can yield a good return when the market turns around. Another major problem we face is that most of our investments are undertaken in a haphazard manner, without a goal in mind. Investing only to make money is a vague idea but if you link it with the goals that you have in mind, you will be headed in the right direction. SIP brings about a discipline to your investing process. The logic is: If we earn regularly and spent regularly then why not invest regularly. SIPs are not only for the long term. You could be saving for the down payment of your house, which is due 15 months in the future or for your child s college education, which will begin three years from now. Here are some ways you can get the best out of your SIPs. Whether it is linking SIPs to goals, or increasing the amount every year in line with the increase in income, these ideas will help you maximize the gains from your SIPs. 1. Link your SIP to goals: As an old saying goes, A Goal without Plan is just a Wish, so every investment plan you create should be backed by a Goal. It could be a short-, medium- or long-term goal. You can create an SIP for every goal, whether it is buying a car, going on your annual vacation or paying for your kid's education. However, you should be mindful of the fact that equity funds should be considered only if the goals are long-term in nature. Depending on the tenure, you should choose the level of exposure to equity. Thus, for your children s education fees, which are due every year, it is best to start an SIP in a liquid fund. Investors should earmark separate SIPs for each financial goal. Here is a sample SIP roadmap for an investor for some popular goals:

4 2. Step up a yearly SIP After defining financial goals, most people lose heart either they find the target amount too big to achieve or they do not have adequate monthly savings to start investing a prescribed sum in SIPs. For example, to accumulate Rs. 30 lakhs in 15 years, you have to start investing Rs. 6,500 each month in an SIP, assuming a 12% rate of return. Do not turn away from your plans even if you do not think you have adequate money. Although SIPs allows you to invest a fixed sum every month, it does not mean you stick to this amount over the entire tenure. As your income rises, your savings will also go up. The SIP amount should also increase in the same proportion. The step-up SIP can have a dramatic effect on your long-term savings. See the graph below; even a 10% increase in the SIP amount every year can give you a 45% higher value. 3. Align your SIP To Your Cash Flow The frequency of the SIP should depend on your cash flow. Most salaried employees get their salary every month. It is convenient for them to give an ECS mandate to their bank so that the money is deducted from their bank account on a particular date of every month. Generally, people prefer to do this transfer during the first week of the month. As the sum is deducted at the start of the month, this enables them to plan their expenses accordingly. It is always ideal to set up the SIP when the income flows in, rather than towards the end of the month. 4

5 4. SIP - The best way to invest in ELSS funds Are you one of those taxpayers who run around to make tax-saving investments at the end of the year? There are umpteen examples of investors rushing to investing just before the year-end for their tax saving. Investing a large amount at one go in an equity fund can be risky. Instead, it is better to spread out the investment across the year by starting an SIP in an ELSS fund in April itself. We did a back calculation and found that an investor, who started investing Rs 5,000 a month in an ELSS fund from April 2010, would have amassed a total of Rs lakh. On the other hand, an investor who put Rs. 60,000 in the same fund at the end of the financial year would have amassed only Rs lakh. The SIP investor made Rs. 55,913 more than the lump-sum investor (see table). st Invested Amount Value as on 31 March 2015 (Rs.) (Rs.) Lumpsum (Rs. 60,000 Every year) 300, ,032 SIP (Rs.5,000 per month) 300, ,945 Difference 55,913 Source: Ace MF, Value as on 31 st March 2015, HDFC TaxSaver(G) 5. Continue your SIP for the Long Term People tend to invest when the market surges and stop when the market plunges but this practice defeats the basic purpose of investing through an SIP. Staying invested over the complete market cycle enables you to even out the market volatility and allows you to take advantage of lower prices. So you should hold the mutual fund for at least 5 years till the market cycle is complete in order to benefit from the SIP. The example below will explain how Mutual fund SIPs can give good returns over the long term. SIP Start SIP End Valua on Current Total Amount Present Profit/Loss Date Date Date NAV (Rs.) Invested (Rs.) value (Rs.) (Rs.) CAGR(%) 01-Jan Dec Dec , ,368 56, Jan Dec Sep ,000 1,064, , Jan Sep Sep ,000 1,732, , Source: Ace MF, Reliance Growth Fund (G), SIP amoun t Rs.10,000 per month A real life example will drive home the benefit of continuing with SIPs when the market dips. Say, in the go-go days of January 2008, you started investing Rs. 10,000 each month in Reliance Growth Fund, one of the top-rated equity funds. Even when the bears ran amok in late 2008 and early 2009, as the global financial crisis hit, you gritted your teeth, continued the SIP, and kept investing through market ups and downs till January Your perseverance and patience would have paid off handsomely. The amount of Rs.9.20 lakh invested over the years would be worth more than Rs lakh today, giving you an annualized return of 16.12%. But what if you, unnerved by sharp market falls, stopped your SIP in December 2011 and also withdrew your entire investment in the same month. Your total investment of Rs.4.80 lakh, in this case, would be worth about Rs.5.36 lakh then translating into an annualized return of 5.84% only. It would have been much better if you had only stopped the SIP and kept the money invested till today. In that case your total investment of Rs.4.80 lakh would be worth about Rs lakh today translating into an annualized return of 14.72%. Hence, it makes sense to invest in equity mutual funds through the disciplined SIP way and continue with them even when the market mood sours. This will help you to build a significant wealth in the long run, which will be useful to fulfill various goals in life. 5

6 Performing Mutual Fund Plans Debt and Hybrid Funds Corpus NAV (Rs.) Annualised(%) * (Rs. Crs)# Gr Div 3 mths 6 mths 1 yr Income Funds Birla SL Dynamic Bond Fund 14, IDFC Dynamic Bond Fund 5, ICICI Pru Income Opportunities Fund 2, Ultra Short Term Plan ICICI Pru Flexible Income Plan 13, IDFC Ultra Short Term Fund 3, Gilt Funds SBI Magnum Gilt-LTP HDFC Gilt-Long Term Plan Liquid Funds Pramerica Liquid Fund HDFC Liquid Fund ICICI Pru Liquid Plan Hybrid - Monthly Income Plans(MIPs) Birla SL MIP II-Wealth 25 Reliance MIP ICICI Pru MIP 25 Crisil Composite Bond Fund Index Crisil Liquid Fund Index 1,677 2,766 1,071 18,485 24, ,658 1, , , , , , , Crisil MIP Blended Index 2, *Returns are compounded annualized as on 31st August 2015 # Monthly Corpus as on July

7 Performing Mutual Fund Plans Equity and Hybrid Funds Corpus NAV (Rs.) CAGR (%)* (Rs. Crs)# Gr Div 1 yr 3 yrs 5 yrs Equity - Large Cap Birla SL Equity Fund 2, Kotak Select Focus Fund 3, SBI BlueChip Fund 2, Equity - Multi Cap Franklin India High Growth Cos Fund 3, L&T India Value Fund MOSt Focused Multicap 35 Fund 2, Equity - Mid & Small Cap SBI Small & Midcap Fund Mirae Asset Emerging BlueChip Equity - Sectoral UTI Transportation & Logistics Fund SBI Pharma Fund Tax Saving Scheme(ELSS) Axis LT Equity Fund Birla SL Tax Relief '96 Balanced Fund L&T India Prudence Fund Tata Balanced Fund Sensex Nifty ,879 2,034 *Returns are compounded annualized as on 31st August 2015 # Monthly Corpus as on July , , Reliance Tax Saver (ELSS) Fund 4, SBI Magnum Balanced Fund 2, ,

8 This document is solely for private circulation only. Mutual funds like securities investments are subject to market risks and other risks. Investors are advised to read the offer document before investing.