Systematic Investment Plan (SIP):
SIP is a financial planning tool available for policy holder’s to create wealth and achieve their long term financial goals by contributing a fixed amount in a selected fund(s) at regular intervals, which could be either monthly, quarterly or yearly. The key benefits of SIP to policy holders are rupee cost averaging and also it inculcates disciplined approach towards financial savings rather than ad hoc investment decisions.
With the help of SIP, policy holders need not be concerned about timing the market correctly. Market timing risk is the risk of entering the market at a high price which may reduce long-term returns, or the risk of losing out on upside by waiting too long for a low level to enter. Policy holders trying to time the market correctly have either missed out big market rallies or have invested a lump-sum amount just when the markets have peaked. SIP helps policy holders ride the market volatility by averaging out the cost as they invest a fixed sum regularly at various levels.
SIP also helps in benefitting from the power of compounding, which means longer the investment horizon, the greater the benefit.
SIP is a tool to reduce risk of market timing, and as such it is not a return maximizing tool. In a rising market SIP investing underperforms lump sum investing at inception and in a volatile market SIP outperforms lump sum investment. Given that markets on average tend to be volatile rather than uniformly rising, usually SIP is a good risk management tool for policy holders in reducing market timing risk.
Exhibit 2: Policy holder systematically investing
|Premium||Date||Invested Amount (`)||NAV (`)||Units|
|Premium 1||November 27, 2001||2,00,000||10.33||19,361|
|Premium 2||November 30, 2002||2,00,000||10.88||18,382|
|Premium 3||November 29, 2003||2,00,000||18.52||10,799|
|Premium 4||November 30, 2004||2,00,000||23.05||8,677|
|Premium 5||November 30, 2005||2,00,000||32.10||6,231|
|Premium 6||November 30, 2006||2,00,000||46.48||4,303|
|Premium 7||November 30, 2007||2,00,000||66.33||3,015|
|Premium 8||November 28, 2008||2,00,000||34.53||5,792|
|Premium 9||November 30, 2009||2,00,000||60.80||3,289|
|Premium 10||November 30, 2010||2,00,000||71.41||2,801|
|Premium 11||November 30, 2011||2,00,000||60.12||3,327|
|Premium 12||November 30, 2012||2,00,000||72.49||2,759|
|Premium 13||November 29, 2013||2,00,000||79.29||2,522|
|Premium 14||November 28, 2014||2,00,000||113.70||1,759|
|Premium 15||November 30, 2015||2,00,000||109.76||1,822|
|Premium 16||November 30, 2016||2,00,000||111.96||1,786|
|Premium 17||November 30, 2017||2,00,000||138.09||1,448|
|Total, Average||`34.00 Lacs||Average NAV
|Fund Value||December 31, 2017||`139.79 Lacs||NAV
Fund performance only. Actual example for policy holder investing systematically in Maximiser fund I. Comp/doc/Jan/2018/0785.