Systematic Investment Plan (S.I.

P)
Introduction:
An investor has many options for making his investments. However, all of them do not give optimum returns at little or no risk. An investment in mutual fund is an investment that gives results comparable to trading in shares and the risks are reduced quite a lot. Almost all mutual fund houses have started Systematic Investment Plans (SIP) over a last couple of years. They harp upon the minds of investors to invest in the SIPs to minimize the market risks. Is it the complete truth? Is it possible to do something else to beat the market risks and at the same time maximize the returns? These are the questions that I hope to answer through this project report. However, one must have some basic knowledge about mutual funds before attempting the answers.

Importance of investment planning:

Essentially, Investment Planning involves identifying your financial goals throughout your life, and prioritizing them. For example, if you want to invest for funding your vacation next year, don't choose an investment vehicle that has a three-year lock-in. Similarly, if you want to invest for your daughter's marriage after 10 years, don't invest in 1yr bonds for the next 10 years. Instead, choose an option that matches your investment horizon. Investment Planning is important because it helps you to derive the maximum benefit from your investments. Your success as an investor depends upon your ability to choose the right investment options. This, in turn, depends on your requirements, needs and goals. The choice of the best investment options for you will depend on your personal circumstances as well as general market conditions. For example, a good investment for a long-term retirement plan may not be a good investment for higher education expenses. Investments are in stocks, bonds, and other types of security investments. Indirect financial investments can also be done with the help of mediators or third parties, such as pension funds, mutual funds, commercial banks, and insurance companies.

What is mutual fund?

A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities - ranging from shares and debentures to money market instruments or in a mixture of equity and debt, depending upon the objectives of the scheme. The income earned through these investments and the capital appreciation

realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Investments in securities are spread across a wide cross section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move on the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits (or losses) are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. Before collecting funds from the public, a mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI), which regulates securities market. A mutual fund is set up in the form of a trust, which has sponsors, trustees, Asset Management Company (AMC) and a custodian. The trust is established by a sponsor or more than one sponsor who is like promoter(s) of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. AMC approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of funds in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual funds. SEBI regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launce any scheme.

What is Net Asset Value (NAV)?

Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund. Mutual funds invest the money collected from the investors in the securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis.

NAV =

The market value of securities of a scheme______ Total number of units of the scheme on any particular date

For example, if the market value of securities of a Mutual Fund scheme is ` 200 lakhs and it has issued 10 lakh units of ` 10 each, to the investors, then the NAV per unit of the fund is ` 20. NAV is required to be disclosed by the Mutual Funds on a regular basis - daily or weekly - depending on the type of scheme.

Different Types of Mutual Fund Schemes:

Schemes According to Maturity Period
1. Open-ended Fund / Scheme: An open ended scheme or a fund is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period and investors can continuously buy and sell units at NAV related prices, which are declared on daily basis. Thus, the key feature of an open-ended scheme is liquidity. 2. Close-ended Fund / Scheme: A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of new fund issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on the stock exchanges. These mutual fund schemes generally disclose NAV on weekly basis.

Schemes according to Investment Objectives:

A scheme can also be classified as growth scheme, income scheme or balanced scheme considering its investment objective. Such schemes may be open-ended or closeended schemes. Such schemes may be classified mainly as follows: a. Growth / Equity Oriented Schemes: The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option; capital appreciation etc. and the investors may choose an option depending on their preference. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. b. Income / Debt Oriented Scheme: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital 3 appreciation are also limited in such funds. The NAVs of such funds are only affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long-term investors may not bother about these fluctuations. c. Balanced Fund: The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. The funds generally invest from 40:60 to 60:40 percent in equity and debt instruments respectively. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile as compared to pure equity funds. d. Money Market or Liquid Fund: These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposits, commercial paper and inter-bank call money, government securities etc. Returns on these schemes fluctuate much less as compared to other schemes. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short duration. e. Gilt Fund: These funds invest exclusively in government securities. Government securities have no default risk. f. Index Funds: Index funds replicate the portfolio (of scripts as well as proportion) of a particular index such as BSE Sensex, NSE Nifty etc.

g. Sector Specific Funds / Schemes: These funds / schemes invest in the securities of a particular sector of industries as specified in the offer documents; e.g. Pharmaceuticals, Software, Cement, Banking etc. Returns are more but risk is also more. h. Tax saving Schemes: These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961. Government offers tax incentives for investments in specified avenues e.g. Equity Linked Saving Schemes (ELSS). These schemes are growth oriented and invest predominantly in equities. The returns and risks associated are like any other equity-oriented scheme.

Why choose Mutual Funds?

Investing in Mutual Funds offers several benefits: Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced. Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc. Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day. Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund manager's investment strategy. Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience. SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.

Role of SEBI:
SEBI formulates policies and regulates the mutual funds to protect the interests of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds - whether promoted by public sector or private sector entities including those promoted by foreign entities - are governed by the same set of regulations. There is no distinction in regulatory requirements for those mutual funds and all are subject to monitoring and inspections by SEBI. Also, the risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar types.

The market is volatile. Prices will flare or plummet or move up and down. It is not always possible to buy at the bottom or sell at the top. A way to cushion again volatility and keep the price down is to invest regularly at given periodicities. Let us assume that you have ` 1,00,000 to invest every month. As opposed to waiting for the right time, if you invest the amount every month, over a period of time the cost of your purchase will even out. In one month you may get 1,000 units, in another 950 and in yet another 1100. Systematic investment is making investments regularly without too much concern on the time you are investing, for the log-term as over the long-term the price of purchase will even out.

S.I.P. (Systematic Investment Plan)

For Investment purpose, we often wait to collect a large amount of money and invest it all at once. These investments are done to achieve our future goals like buying a house, child's education, marriage or retirement planning. However recurring household expenses always erode the money which we would have otherwise kept for investments and the result - we end up compromising on our financial goals. So, in order to get the dual benefits of investment and that too of small amount periodically, we have Systematic Investment Plan (SIP). Systematic Investment Plan (SIP) is a financial planning tool that allows you to invest in sip mutual fund through small, periodic installments. Moreover you can also select the

tenure of your investments & it helps you set aside a fixed amount every month for investments thus contributing towards your financial goals. SIPs help you set aside a fixed amount every month for investments thus contributing towards your financial goals. SIP enables ones to use a fall in his schemes NAV to his advantage. When the NAV falls due to fall in the market, you will accumulate more units at a lower price. A SIP restrains one from going overboard in a rising market by giving you fewer units at the higher levels. In the long run, this disciplined approach to investing tends to bring down your average unit price.

Benefits of SIP:
1. Light on the wallet: It is easier to build a long term innings with singles than hitting 4s and 6s every time. It is convenient to save ` 500 or ` 1000 every month than trying to save a lakh in one shot. SIP does not hurt and it gives that long term benefit as well. 2. Makes market timing irrelevant: If market lows give you the jitters and make you wish you had never invested in equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-ofsorts with stock market oscillations. But that does not necessarily make stocks a lossmaking investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? Its because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record. 3. Helps you build for the future: Most of us have needs that involve significant amounts of money, like childs education, daughters marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But if you start saving a small amount every month/quarter through SIPs that is treated as sacred and that is set aside for some purpose, you have a far better chance of making that down payment on your house or getting your daughter married without drawing on your PF (provident fund). 4. Compounds returns: The early bird gets the worm is not just a part of the jungle folklore. Even the early investor gets a lions share of the investment booty vis--vis the investor who comes in later. This is mainly due to a thumb rule of finance called compounding. According to a study by Principal Mutual Fund if Investor Early and

Investor Late begin investing ` 1,000 monthly in a balanced fund (50:50 equity:debt) at 25 years and 30 years of age respectively, Investor Early will build a corpus of ` 80 lakhs at 60 years, which is twice the corpus of ` 40 lakhs that Investor Late will accumulate. A gap of only 5 years results in a doubling of the investment corpus! That is why SIPs should become an investment habit. SIPs run over a period of time (decided by you) and help you avail of compounding. 5. Lowers the average cost: SIPs work better as opposed to one-time investing. This is because of rupee-cost averaging. Under rupee-cost averaging an investor typically buys more of a mutual fund unit when prices are low. On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors may even be pleased when prices fall because the fixed rupee investment would now fetch more units To illustrate this well compare investing the identical amounts through a SIP and in one lump sum. Imagine Ramesh invests ` 1000 every month in an equity mutual fund scheme starting in January. His friend, Suresh, invests ` 12000 in one lump sum in the same scheme. The following table illustrates how their respective investments would have performed from Jan to Dec:

Month Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Total Units

NAV 9.345 9.399 8.123 8.750 8.012 8.925 9.102 8.310 7.568 6.462 6.931 7.600

Rameshs Investment Amount Units 1000 107.0091 1000 106.3943 1000 123.1072 1000 114.2857 1000 124.8128 1000 112.0448 1000 109.8660 1000 120.3369 1000 132.1353 1000 154.7509 1000 144.2793 1000 131.5789 1480.6012

Sureshs Investment Amount Units 12000 1284.1091

1284.1091

*NAV as on the 10th every month. These are assumed NAVs in a volatile market

As seen in the table, by investing through SIP, you end up buying more units when the price is low and fewer units when the price is high. However, over a period of time these market fluctuations are generally averaged. And the average cost of your investment is often reduced.

At the end of the 12 months, Ramesh has more units than Suresh, even though they invested the same amount. Thats because the average cost of Rameshs units is much lower than that of Suresh. Suresh made only one investment and that too when the per-unit price was high. Rameshs average unit price = 12000/1480.6012 = ` 8.105 Sureshs average unit price = 12000/1284.1091 = ` 9.345

Reasons to invest in SIP:

In the long term, the SIP investor gains as his investments are unaffected by market volatility. Equity - The best asset class: Equity gives best inflation adjusted return among all asset classes over a long period of time.

*Returns are on CAGR basis. Blue bar reflects inflation adjusted return. As the graph shows, equity is the only asset class which has given positive inflation adjusted return of 9.77% against other asset classes. It is evident from the graph that, in the long term, equity investments have helped outperform various other investment avenues and has also helped beat inflation by a huge margin.

Marriage Planning:
In a country like India with myriad customs and traditions, marriages are lifetime events and could come at considerable cost; as it is every parent wish to make this special event memorable and grand. With the rising income levels, lifestyle & aspirations marriages have become grand events with very high expenses.

Let's take a look at what a typical marriage would cost in days to come. Average cost today (assumed) 5 years later it could cost 10 years later 15 years later 20 years later (Increase in cost anticipated at 6% p.a.) ` 7,00,000 ` 9,36,758 ` 12,53,593 ` 16,77,591 ` 22,44,995

(Inflation is assumed at 6% per annum.) Marriage expenses are going to rise continuously in the coming years with rising aspirations, income level and change in trends. An average cost of marriage that is roughly around ` 7 lakhs today can rise to ` 12.5 lakhs in ten years time.

 Retirement Planning:
Retiring Wealthy is the most desired aspects of Retirement Planning. Thanks to the advances in modern science, the average life expectancy is continuously increasing. Changing trends show that the non-working life of an individual can be longer than his working life. While the social security systems in developed countries have evolved, the one in our country is virtually non-existent. Joint families, which inherently provided such security, are increasingly being replaced by 'nuclear families'. With increasingly stressful life everyone wants to retire early but this requires right planning. For a 25 year old who needs ` 30000 per month today to run his household would require ` 1.28 lakhs per month after 25 years if inflation is assumed at 6%. This comes to ` 15.45 lakhs per annum. Now if one assumes to earn 10% return post retirement, he needs ` 1.55 crores just to meet his monthly household expenses.

Monthly Expense ` 30000/-

Rate of Inflation 6%

No of yrs for retirement 25

Future Value ` 1.28 lacs

You need to plan for retirement because:

Traditional avenue of savings are not sufficient to meet retirement expenses. Rising cost of living. With higher life expectancy you need to provide for around 30 years of your

retired life.
Unforeseen Medical Expenses The Flexibility to Deal With Changes Not all of us are covered under pension schemes. No social security system in India like in the USA.

 Child Education Planning:

It is every parents dream to provide the best of everything to his child. A sound education would undoubtedly be at the top of the list. However, it now costs more to bring a smile on child's face than it once did to educate his father. Quality education comes with an expensive price tag, and you need to invest today in order to gift your precious one the education he deserves tomorrow. With every passing year the cost of child education is increasing beyond our imagination. Apart from course fees there are other expenses involved which are normally ignored.

Course Engineering Doctor MBA Foreign Study

What it Costs Today (`) 5,00,000 15,00,000 8,00,000 15,00,000

5 years later (`) 6,69,112 20,07,338 10,70,580 20,07,338

10 years later (`) 8,95,423 26,86,271 14,32,678 26,86,271

15 years later 11,98,279 35,94,837 19,17,246 35,94,837

(Increase in the cost of education assumed at 6% every year) If the cost of education is going to increase by more than 3 times in next 15 years assuming inflation @ 6% then you need to choose a right asset class to plan for your child's higher education.

Methods of investment through Systematic Investment Plan (SIP) There are many investment methods in SIP now you can invest in your desired shares through SIP. You can invest on the daily, weekly, fortnightly or quarterly basis with the help of SIP. Monthly Systematic Investment Plan (SIP) This is the traditional way of SIP investment in Equity Mutual Fund. This is the best

option for salaried people. Investor can choose any date of each month falling from 1 to 10. Daily Systematic Investment Plan (SIP) In this method, your investment is invested in the fund on daily basis. Some mutual funds offer daily SIP option. This product is best for small traders involved in micro segment. But some people dont like Daily SIP and sometimes it give you losses. Actually, it average your investment on a regular basis but it proves to be a burden sometimes. Flexi Systematic Investment Plan (SIP) Traditional SIP allows you to invest a specific amount on monthly or daily basis. However, the investor of Flexi SIP can invest different amounts in SIP investment at different time periods. He can make modifications month after months in amount to be invested. This cannot be done through mutual funds. With the help of this facility, investor can invest Rs. 1,000- Rs. 10,000 per month and this depends on cash in hand. However, the investors who are not much aware of market conditions should be careful while investing through Flexi Systematic Investment Plan (SIP).

How o start SIP? When you get your salary cheque, you promise yourself you will start saving by putting aside a little sum every month. But, all you do is make the same promise month after month, and you just end up making the promise every month, butno saving really happens. Assuming that you have an appetite for a little risk, the best way out to keep the promise is to start a systematic investment plan (SIP) with a mutual fund scheme. Unlike a one-time investment option, where you invest a lump sum amount at one go once, an SIP allows you to invest small sums at regular intervals. This is how it works While filling up the application form of any mutual fund scheme, opt for a systematic investment option the SIP option instead of instead of opting for a onetime investment. In most cases, you will be asked to select between a quarterly and monthly investment plan. For instance, you can either sign 12 monthly or four quarterly post-dated cheques of equal amount or authorize your bank to debit the amount from your account every month.

The fund company will also ask you for the date on which the withdrawals from your account should take place on a monthly or quarterly basis. It is important to keep in mind that most companies are not really comfortable about changing the date once the SIP comes into effect. There is no entry load, however exit load of 1% is levied if units allotted are redeemed within 1 year from the date of allotment. Once your SIP comes into effect, your fund company will send you an account statement every month or quarter informing you about the number of units and the net asset value (NAV) at which it has been credited to your fund account. An SIP is particularly useful in case of equity funds, as you can average-out your cost of buying mutual fund units. When the NAV of the fund goes up because the market is rising, you get fewer units and when the funds NAV is low or is falling, you get more units.

Thinking of saving up money for the long term- say, 5 years or more? Many people immediately prefer recurring deposits, but do see if you can take some additional risk. If so, systematic investment plans (SIP) with mutual funds can give you a much better return.

So what is better SIP or RD?

Most people are wary of equity funds, even through the SIP route because they are worried about market gyrations hurting returns. Since 2002, the equity market has witnessed quite a few major corrections. Had you continued your SIP in large-cap funds or balanced funds, your annual portfolio return would have been 18 to 24 per cent. Had you opted for index funds tracking the BSE Sensex or Nifty, you could still have achieved a return of 15 per cent. For instance, if you invested Rs 1,000 for 120 months from April 2002, your investment was Rs 1.2 lakh but your present value in HDFC Prudence or Birla Sun Life 95 would be Rs 3.86 lakh or Rs 3.10 lakh. In both the schemes not less than 25 per cent of the assets were invested in debt instruments. For the same period BSE Sensex delivered Rs 2.61 lakh. When you do SIPs in a mutual fund, by investing regularly over a period of time, the impact of market volatility is evened out. As units are acquired at different NAVs, more units are bought when markets are down. At the time of selling; an investor sells all the units at the prevailing NAV and takes out his profits. Under systematic investment plan, one optimises the returns rather than maximising them. For instance, if you start an SIP close to the market peak, you will continue to buy units at higher levels all the way down to the bottom. This may impact the short term return but cost averaging may help you to earn better return than fixed instruments when market turns better.

A Recurring Deposit is an ideal way to invest small amounts of money every month to build a corpus. The advantage with RD is that the interest rate paid by the bank will be the same throughout the tenure of the investment. Banks also allow you to take a loan against the deposit account. Taking the above instance, the interest rate offered by the banks in 2002 was in the band of 5.56.25 per cent. Several investors could have opted for the RD during this period. But in the last decade average inflation was at 6.5 per cent and it effectively meant that the returns fail to beat the inflation. But lower returns do not necessarily make RDs an unsuitable product. A retiree having monthly surplus in the early part of retirement could use RDs to supplement his income. Or a person having other equity investments can use RDs to have a safe portion to his portfolio. A simple thumb rule is that if your retirement corpus is less than 240 times of your monthly need, you could add SIPs based on your risk appetite. It is best not to use an RD to meet long term goals such as education or marriage expenses. For instance in April 2002 if you had started RD of Rs 1,000 for 120 months with a return of 6.25 per cent your investment could have grown to Rs 1.67 lakh and your post-tax return could have been still lower. Similarly if you start RD at 9.25 per cent today your maturity value will be Rs 1.97 lakh. Conclusion A choice between a SIP and RD should be based on three factors - your investment horizon or goals, risk appetite and the state of your portfolio. Although with RD you can predict the maturity value, you need to factor in post tax returns as your income tax slab increases over the years. Most people worry about the equity markets turning down when they need their money. But if you completely book profits on your portfolio once your target is reached, you could attain your goal ahead of time. With Rs 1,000 invested in an SIP from April 2002 for 63 months in HDFC Prudence Fund, you could have hit the target of Rs 1.67 lakh in June 2007, with 57 months still left for your target.

List of top10 Mutual Funds in India: Mutual Fund Company Reliance Mutual Fund HDFC Mutual Fund ICICI Prudential Mutual Fund Company Creation Date 30th June 1995 Assets Under Management (Rs. Crore) 31st Mar 2011 101,577

Rank 1.

2. 3.

30th June 2000 25th November 1994

86,282 73,466

Rank 4. 5.

Mutual Fund Company UTI Mutual Fund Birla Sun Life Mutual Fund SBI Mutual Fund Franklin Templeton Mutual Fund Kotak Mutual Fund DSP BlackRock Mutual Fund Tata Mutual Fund

Company Creation Date 24th August 1998 24th December 1994 29th June 1987 19th February 1996 23rd June 1998 16th December 1996 30th June 1995

Assets Under Management (Rs. Crore) 31st Mar 2011 67,189 63,696

6. 7.

41,672 37,883

8. 9.

32,202 30,601

10.

22,681

Application form of SIP: