Q
I have invested in post office schemes and bank deposits, as I am comfortable with these avenues. My relationship manager is asking me to invest in SIP of equity funds. Is SIP suitable for me?
A
It is true that equity funds are more risky than post office schemes and bank deposits. However, one need to appreciate the fact that SIP reduces the volatility associated with equities as one does not enter into the market in one go. By avoiding equities, you can avoid the risk of volatility at the cost of lower rate of wealth creation. Consider the growth of value of Rs.5,000 per month over a period of 5 years in the table below. The wealth accumulated under SIP in Nifty is almost double than that under other avenues. If a 5-year period results in so much of difference imagine how much difference it can make to the growth of your savings over a period of say 10 or 20 years.
| Investment avenue |
Rate of return |
Investment value of Rs.5000 per month after 5 years |
| PPF |
8.00% |
Rs. 3,67,069.89 |
| Post Office Recurring Deposit |
7.50% (compounded quarterly) |
Rs. 3,64,448.61 |
| SBI Recurring Deposit |
8.00%* |
Rs. 3,67,069.89 |
| SIP in HDFC Balanced Fund |
16.66%** |
Rs. 4,49,258.07 |
*Interest rate for recurring deposit in SBI has been considered if investment had been made five years ago.
** XIRR if SIP is done on 5th of every month.
You should also consider the point that if one stays invested with equities for long-term; the risk of losing money reduces. There is no doubt that Indian economy is expected to outperform all its peers in the next few years and as a result Indian Markets are also expected to have a great run. This means that one should expose himself to Indian equities through SIP.
Q
Should aggressive equity funds like sector or thematic funds be considered for SIP or investment in relatively conservative equity funds like diversified or largecap funds would be better?
A
For SIP investment, both types of funds i.e. more aggressive funds (like thematic/midcap) and less aggressive funds (like diversified/largecap) could be considered. However, the key factor here is investment duration. If your investment duration is say, 3 years, then a less aggressive fund would be more suitable. However, if the investment horizon is 5 years or so, funds which are high on aggression could be preferred. Hence higher the aggression of the fund; more should be the investment duration.
Q
There are also talks to daily SIP being more favourable than monthly SIP. As per your opinion, which method is more beneficial?
A
Daily SIP plan is being offered in the market by multiple AMCs, which allows an investor to invest a pre-fixed amount (as indicated by the investor) on a daily basis in equity funds. There are also daily STPs which allows an investor to invest a lump sum amount in a liquid scheme and later into an equity scheme. On daily basis, amount specified by the investor is transferred to equity scheme of the same AMC. Daily STP helps in capturing daily movements of the market, unlike regular SIPs where investments are made on a monthly basis. However, past data suggests that the difference in returns between these two modes is quite negligible in most cases. Hence, it cannot be said that daily SIP has beat monthly SIP. You can choose the method which suits you the most.
Q
Recommended schemes which could be considered for SIP