A = P * (((1 + r/n)^(n*t) - 1) / (r/n))
Inflation-Adjusted Future Value = A / (1+i)^t
A = Future Value
P = Monthly Investment
r = Annual Rate of Return
n = Number of Compounding Periods per Year (12 for Monthly)
t = Investment Period in Years
i = Annual Inflation Rate
An investment in a mutual fund through Systematic Investment Plan (SIP), under which the unit holder contributes, say Rs 5,000/- on a monthly basis to a mutual fund scheme for a pre-determined time period, is received with appreciation the world over but more so in India, where the product is very well accepted among the investors.
Through SIP route of investing in mutual fund, an investor can start investing either starting at a low amount and enhancing it over time or contributing regular fixed amounts at regular interval (monthly or quarterly) so as to experience phenomenon known as rupee cost averaging. In other words, instead of investing the money all at one go (lumpsum), one contributes fixed amounts periodically thereby reducing the pinch of market risk on investments.
They are overseen by SEBI, and any mutual fund company that issues schemes with SIP facility has to be registered with SEBI, and will be governed by the various SEBI rules and regulations. For instance, one of the most crucial SEBI regulations is a ‘Know Your Customer’ (KYC) norm. Under mutual fund investment, this might require a mutual fund house to know the identity and the address of the customer (investor) before taking investments.
This one aside, the tax treatment of the SIP investment is equally important for the SIP investors in India to look at. The taxes levied on mutual fund investments depend on various factors such as what type of fund is invested in (equity or debt) and the tenure of investing to fulfil the lock-in period. The long-term capital gains of equity mutual fund investment have a lower tax slab while the short-term capital gains that these investments generate have a different tax slab. A good way to keep track on how much SIP investment will impact your tax table is to ask a tax-advisor or a certified financial advisor to help you along.
But when you are investing through SIPs, you can only buy whatever the mutual fund scheme is selling at that point in time. That implies you need to select a mutual fund scheme which suits your purpose and risk profile among a whole host of equity or debt mutual fund schemes available with different investment objectives and risk profiles. For instance, equity mutual fund schemes are mandated to invest at least 65 per cent of their total assets in equity and related instruments and depend on the stock markets for their returns. Equity mutual funds schemes, hence, presuppose higher returns with higher risk. On the other hand, debts mutual fund schemes invest in the fixed-rate investing securities such as bonds, debentures, etc. These securities are relatively stable with relatively lower volatility of returns. The mutual fund investors have various mutual fund schemes to choose from for their investment goals but also risk appetites.
Third, study the promoters' and adviser's qualifications as well as the mutual fund house's track record and scheme-specific track record. Make sure to address questions such as whether the religious or ethical principles of your community are respected, if a larger religion is not your religion; and if your Individual Social Investment (ISI) activities will be respected rather than quashed, and not just tolerated. Also, enquire about the credibility of the mutual fund house and the individual scheme, and whether these funds are registered with the Securities and Exchange Board of India (SEBI), have a strong fund-management team, and a clear track record of performance. Historical returns, risk measures and peer comparison of such schemes can be calculated on many websites.
The concept of ‘SIP’ revolves around the process of making investments by a fixed amount on regular basis (SIPs are monthly investment plans) whereas Lumpsum is investing one large sum at once.
Advantages of SIP:
Advantages of Lumpsum Investment:
Before starting a SIP, consider the following factors:
Using SIP calculator, the estimated future value will be:
This example shows the power of compounding and rupee cost averaging effect of monthly regular investments from SIP every month. A big amount of corpus can be built over a 10-yr time period (assuming the starting ticket size to be Rs 10,000 a month). However, since equity mutual fund returns depend on how the market behaves, so do the accumulations on the basis of the performance of different mutual fund schemes and market as well.