You must have heard this statement more than n times now that … SIP is the best investment style So lets understand why SIP has emerged as the most powerful.

You must have heard this statement more than n times now that …

“SIP is the best investment style”

So let’s understand why SIP has emerged as the most powerful style of investing in recent times through

some real life examples….

There are basically three points that makes SIP such a strong concept

Rupee Cost Averaging

Power of Compounding

Market timing irrelevance

Let us simplify these terms in next few slides…

Rupee Cost Averaging

To understand this concept more practically look at the illustration below. The SIP investor finishes with an investment that is worth more than the lump sum investor after six months - even though the starting price and finishing price are exactly the same. Unlikely but it is true. Check the figures yourself ….This is the first thing what SIP does; it averages the buying cost automatically.

Month Lump sum Investor SIP Investor

Unit Price (Rs.) Amount Invested Units Purchased Monthly Investment Units Purchased

1 20.00 60000 3000.00 10000 500.002 18.00 10000 555.563 14.00 10000 714.294 22.00 10000 454.555 26.00 10000 384.626 20.00 10000 500.00

Total Invested 60000 60000Total Units Purchased 3000 3109

Average Price Paid 20.00 19.30

Value of Investment after six months at current unit price say Rs.20 60000 62180

Power of CompoundingThis mathematical formula of compounding : FV = PV (1 + r) n is known to all of us but is seldom understood in terms of investing. Let’s use an example : If you invested Rs. 100000 PV (Present Value) in a instrument that grows @ 15% per year (the r) for a period of 25 years (the n), its FV (Future Value) will

become Rs.3291895. Unbelievingly the amount multiplied to a whopping 33 times

Now the let’s see how the same compounding plays in a SIP over a period of time. The table below justifies all statements of the Power of Compounding. A meager amount of Rs. 1000 per month over 25 years at an

annualized growth rate of 15% accumulates to a humongous number of approximately Rs. 33 lakhs

Growth rate of 15% p.a.

Amount saved per month

5,000 1,500,000 16,420,369

3,000 900,000 9,852,221

1,500 450,000 4,926,111

1,000 300,000 3,284,074

Total Amount Saved

Value after 25 years

Market timing is irrelevant

Let’s look at the above analysis in the next slide whether it actually happens …

Data Source : Bloomberg

Time in the market matters; not timing

*CAGR (Compound Annual Growth Rate) -The year-over-year growth rate of an investment over a specified period of time

Data Source : Bloomberg

Now that we have seen the Power of SIP; let’s try to address this point …

“When SIP works best for us”

Few slides from hereon will explain this more clearly

SIP will work best if following acts are done:

Start Early

Invest Regularly

Invest for Long Term

Invest in the Right Asset Class

Let’s look at each aspect from a practical angle…

Start Early – Let’s flip around and see Cost of Delay through “Ram aur Shyam ki Kahani”

RamRam Shyam Shyam• Starts investing at the age 28 48• Monthly Investments Rs.5,000 Rs.15,000• Returns (assumed) p.a. 15% 15%• Both invest till the age 58 58• Total investment 18,00,000 each• Accumulation at 58

350.49 lacs 41.79 lacs

To catch up with Ram, Shyam has two choicesEarn on his investmentOR Save per month

To catch up with Ram, Shyam has two choicesEarn on his investmentOR Save per month

@ 45% p.a. Rs. 1,25,000

Invest Regularly

Invest for Long Term

Hence longer your SIP Period

• Lower the risk• Greater the effect of compounding• More predictable average returns

Data Source : Bloomberg

Invest in the Right Asset Class

Undoubtedly Equity is the winner overtime…

Now that we have seen why and how SIP can best work - a question still remains unanswered ….

Can SIP help individuals like you and me in real life situation to

meet our financial goals ?

Let’s try to answer this question through a simple case study and see whether benefits of SIP really work …

Case Study – Real Life Situation• Assume –

– You are 30 yrs of age; have a wife and kid– Current Annual expenditure of Rs. 5,00,000 – Retirement expected at age 60 yrs

• More – – Average prices (i.e. inflation) will rise by 7% pa – After 30 yrs when you retire, the low risk rate of return will be 6% pa

(Considering you put all your accumulated corpus post retirement in a bank deposit)

– You will live for more 20 years post retirement

So let’s see what will be the corpus required at the time of your retirement to maintain the same current lifestyle additionally with enhanced medical expenses

Your TargetCurrent Expenditure

Rs.5,00,000 p.a.

Expenditure at the time of Retirement Rs. 36,00,000 p.a.

Inflated at 7% p.a. for 30 years

Income to be generated post Retirement Rs. 36,00,000 p.a.

Therefore to generate this income every year post retirement you need to accumulate a corpus

Corpus Required at the time of Retirement

Your first reaction Impossible! It cannot

be achieved. But then there is a

solution…

So what’s the Solution… Just one simple thing

Subscribe for an SIP of Rs.15,000 per month in a good diversified equity fund for 30 years and forget it

You still don’t believe it that it can be that simple; let us validate our conviction with actual returns generated in a equity fund over the

yearsHDFC Equity Fund

SIP Investments 15 year SIP 10 year SIP 5 year SIP 3 year SIP

Total Amount Invested (Rs.) 2,700,000 1,800,000 900,000 540,000

Market Value as on July 29, 2011 (Rs.) 34,379,093 8,682,024 1,427,405 798,522

Returns (Annualised)*(%) 29.87% 29.64% 18.56% 27.29%

Benchmark Returns (Annualised)(%)# 15.87% 18.42% 8.36% 14.08%

Market Value of SIP in Benchmark# 9,967,057 4,737,423 1,110,339 664,982

From the table it is crystal clear that if an investor did an SIP of Rs.15000 per month in HDFC Equity Fund for 15

years, he would have invested 27 lacs and that would have grown to a whopping number of 3.4 crore as on date; in spite of so many pitfalls in equity markets in last 15 years.

Still need to think; No pressure but see this what the delay can cost in the same case study

9,60,000 5,76,000 2,32,000 1,80,000 Annual

80,000 48,000 21,000 15,000 Monthly

 Investment Required

10152530Time to Retirement (yrs)

Current Age : 30 yearsRetirement Age : 60 yearsRetirement Corpus to be accumulated : 8 cr.Assumed Rate of Return on Investment : 15% p.a.

With every passing year the time to retirement is reducing and increasing the burden of investment required. Now the choice is our whether we want

TO START NOW OR STILL WAIT

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