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
`62.34
 
Fund Value March 31, 2018 `132.89 Lacs NAV
`135.49
Total Units
98,074
Annualized Returns   14.7%    

 

Fund performance only. Actual example for policy holder investing systematically in Maximiser fund I. Comp/doc/Jan/2018/0785.

 

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