Introduction to Best SIP Plans in India:
Best SIP Plans in India. Systematic Investment Plans (SIPs) have become one of the most popular methods for regular investments in mutual funds. Whether you are a seasoned investor or just starting out, SIPs provide a disciplined approach to grow wealth over time. By investing a fixed amount each month, you can take advantage of market fluctuations and benefit from the power of compounding.
This article delves into how SIPs work, the importance of consistency, and the historical data that shows their effectiveness in generating returns. Whether it’s about the benefits, how SIPs compare to lump sum investments, or transitioning to direct mutual fund SIPs, we cover it all to help you make informed decisions.
What is SIP?
Every month, SIP is used to invest in stocks regularly. But how does SIP work? How does it generate returns? We will see through an Excel sheet in this video. Friends, I have often talked about Disciplined Investing.
Importance of SIP
And its best example is SIP i.e. Systematic Investment Plan. Now, you must have heard about SIP from many people. Mutual funds keep doing SIP, SIP, small case SIP, SIP. I also keep doing SIP, SIP.
How Does SIP Work?
So, how does SIP work? How is it that every month, if you are investing money, then it actually results in compounding? This is a very fundamental question that many people have asked. I am telling them that every month, you have to decide one day, you have to put all your money in the stock or the mutual fund or the small case. But, no matter what the price is, you will always invest on the same day.
So, their mind works like this:
- Suppose, today I bought that share or mutual fund for Rs.100.
- Next month, it will be of Rs.110.
- So, why am I buying an expensive share? Why am I not waiting for that share to actually be less than Rs.100? Because then I will get more returns.
Confusion in Investing
And this confusion, that is basically what hampers the entire investment thesis. So, today in this video, through an Excel sheet, I will try to show you how SIP ultimately generates returns, how they are separated from the lump sum, and at the time of signing up for SIP, which is a very important thing, which is at the end of the video.
Analyzing Historical Data
First of all, how does SIP work? For this, I went to the Association of Mutual Funds in India, where basically all the mutual funds have historical data. And I picked up one mutual fund and tried to analyze it. So, as you can see on the screen, I am on the screen of the Association of Mutual Funds in India.
And there is a thing called NAV, which you must know about mutual funds. It’s called Net Asset Value. Just like the price of a stock for long term investment, similarly, the unit of a mutual fund, its stock price equivalent is called NAV or Net Asset Value. Now, as this Net Asset Value increases, the investment of your mutual fund also increases.
Downloading Historical Data
So, you can go here and download any old data of any mutual fund. All of this is freely available for you. So, I went and these are all ABN AMRO, Aditya Billa, etc. So, I picked up one which was PPFAS, Parag Parikh’s fund. This is not a recommendation, by the way. I am picking it up randomly because I invested in Parag Parikh. But please, don’t do anything on my request. Use your intelligence. And there are many more in it.
Selecting a Fund
I picked up FlexiCap Direct Plan, which is a growth plan. And then you can go and check the NAV. There is a limitation that you can only download it for 5 years. But that’s perfectly fine. We will do that.
Historical NAV Analysis
So, this is the historical data from August 2011 to 27 July 2016. Because, as I said, the fund was launched around May 2013, I am assuming. So, the last data of 28 May 2013 is recorded, which is 9.9992. Usually, the NAV starts from 10. And then you can see that as it is increasing, so you go all the way. On 27 July 2016, the NAV of 10 became 18. Which means, in about 3 years, it has almost doubled.
SIP Investment Calculation
I started the same thing in 2016. So, you can see this. From 1st August 2016 all the way to 1st July 2021. The same NAV which was 10 in May 2013, has now become 45. Which means, it has increased 4.5 times in the last 7 to 8 years. So, I have plotted all this data in my Excel sheet. Because I wanted to show you.
Visualizing NAV Growth
So, let’s zoom in a little. Okay. Alright. So, this is your NAV date. This is your NAV. We will come to SIP, which I have put Rs. 5000. But, I just want to see how it worked. So, I will just plot all the NAVs. Because, I want to see that once. So, we will plot it here.
So, you can see this. If we plot it on the back screen, then move chart, new sheet. Okay. Right. So, you can see on the screen, this is the plot of Parag Parikh’s FlexiCap growth direct plan.
How SIP Generates Returns
Now, I am telling you this. Which is what the SIP means. That if we had started this on May 2013, then we started putting Rs. 5000 every month with full intensity. Which is the SIP.
So, every month we used to put Rs. 5000 on 28th. So, on 28th May, Rs. 5000. On 28th June, Rs. 5000. On 28th July, Rs. 5000. So on and so forth. All the way up to 28th June 2021, Rs. 5000.
Evaluating Investment Value
And what we want to now calculate is, what return would have been generated on the basis of this. If we are able to do that. And how does it actually translate? Now, as I told you, a mutual fund usually gives you 10-12%, typically 12-14% return. And we have to see whether that is true or not.
Benefits of SIP
The best thing about the SIP is, if you are putting money with full discipline every month, then you don’t have to think about whether the market is up or down. And frankly, you and I, at least me, don’t have any knowledge to estimate whether the market is down or up. Or if the market is up, then it should stop.
And I don’t even want to think about it. I just want to invest money with full discipline every month. And I don’t want to second-guess whether the market is up or down. And over time, I want to see, does it give me a good return or not? That is the only question that I am trying to answer.
Summary of Investment Data
So, let’s get back to the sheet. So, this was ours. So, I started SIP with Rs. 5000. So, every month, as you can see, we have invested Rs. 5000. And then I am asking, if I had invested Rs. 5000 in 2018 and sold it now, which is around 28th June, then what would be the value of that money?
- And this is the amount. Means, Rs. 22,000 would have been almost there.
- If I had invested Rs. 5000 then. But now I am investing every month. So, every month, Rs. 5000, 5000, 5000, 5000, 5000. And then the same amount. So, you can see how this amount is varying.
Cumulative Investment Value
Tuck, tuck, tuck, tuck, tuck. And then I am calculating how much this cumulative will be. Means, I have invested Rs. 5000, the total of which is Rs. 4,90,000.
- I have invested Rs. 4,90,000 till now, which is from 28th May 2013 to June 2021.
- And that Rs. 4,90,000 has now become Rs. 11,60,000. So, in 8 years, my money has more than doubled. And it’s the same amount.
Now, you can change this amount. So, if we convert this to Rs. 10,000. And SIP has invested Rs. 10,000 everywhere.
- So, Rs. 10,000 means, till now we would have invested Rs. 9,80,000.
- And that total would have become Rs. 23,00,000. You can do the same thing.
If you would have invested Rs. 20,000 per month instead of Rs. 10,000. Which is of course difficult. I understand that every month from the beginning. But if you would have invested, then you would have invested Rs. 19,60,000.
- And that total would have become Rs. 46,40,000. The return percentage is the same. The numbers are increasing because of course, that value is increasing. So, we stay at Rs. 5,000.
Evaluating Returns
Now, how much did this return translate? We have to see that. And let’s calculate that. So, first of all, I will calculate the absolute return.
Absolute Return Calculation
- Investment: Rs. 5,000 on May 2013
- Current Value: Rs. 22,000
- Total SIP Investment: Rs. 11,60,000 on Rs. 4,90,000
- Total Return: 137%
This is the absolute return.
Annual Return Calculation
We have to convert this absolute return into an annual return. It has a simple formula. Don’t worry about the formula. By the way, I will pin this excel sheet. So, you will be able to see it.
So, this basically says that in this mutual fund, in 8 years, on an average, it has given a return of 11%.
- If you had bought it in June and sold it now: 11%
- If done a year later: 11%
- If for 6 years: 12%
- If for 5 years: 13%
- If for 4 years: 14%
- If for 3 years: 17%
- If for 2 years: 22%
- If for 1 year: 25%
Now, that’s largely because all the growth in our stock market that has happened in the recent past. There was not so much growth in the last few years. It was a little flat. But that is the truth with everything.
Performance Summary
This is, by the way, a good performing mutual fund. The rest of the mutual funds will also have more or less the same situation. This means, and that is the best part.
- Risk Level: No risk taken
- Comparison: Almost like a fixed deposit
- Monthly Investment: Rs. 5000 every month in a mutual fund, small case, or stock
Money Growth Overview
And at the end of 8 years, your money has increased by 135%. Which means it has increased by 2 times.
- Doubled in 7 years: 109% return
- Increased by half in 2 years: 48%
- Initial Investment: Rs. 100 now has become Rs. 150
That is how it works. And the beauty is, you don’t have to time the market. You don’t have to think when it is going up and when it is going down.
Importance of SIP Plan
You have to put in the same amount with full discipline. The more you can increase, the better it will be. To do SIP, which is by the way the best way to do it.
And especially if you are doing it in a mutual fund. There is a very important thing that needs to be kept in mind. And that is, when you do SIP, there are two ways to take SIP.
- Direct Plan
- Regular Plan:
- From your bank
- Recommendations from friends or family
It may seem like a great thing. Because they will give you recommendations, etc. But mutual fund has a very important selection criteria.
Understanding Expense Ratio
But mutual funds have a very important selection criteria: Expense Ratio. The expense ratio is the percentage that will be deducted from your total amount. It will not be invested.
- Example: If your expense ratio is 1%:
- You give Rs. 100 to the mutual fund.
- Only Rs. 99 will go into the investment.
- Rs. 1 will be kept by the mutual fund for its own expenses.
What is Included in the Expense?
Now, what is that expense? First of all, the expense of running the mutual fund includes:
- Fund managers’ salaries
- Office expenses
- Operational costs (e.g., bungalow, car, etc.)
Choosing Direct Plan Over Regular Plan
But more importantly, if you buy a regular fund, the agent’s commission is included in that expense ratio. That is why when you are taking a regular plan of a mutual fund SIP, it is always more than a direct plan.
- Action Point: If you have any mutual fund on a regular plan, converting it directly is the most important thing that you can do.
However, this can be complicated due to:
- Exit Load: If you exit before a certain time, the mutual fund deducts an amount.
- Short-Term Capital Gain Tax:
- If you sell that mutual fund before a year, the tax is 15%.
- If you sell it after a year, the long-term capital gain tax is only 10%.
Using IND Money for SIP Management
And that is why I wanted to suggest a feature on IND Money, which I personally use to move my regular mutual fund SIPs to a direct mutual fund SIP.
- On the IND Money app:
- You can see all your mutual funds.
- It tells you how many mutual funds are in regular.
- It shows how much savings you will have by switching from regular to direct plan.
For example:
- Access-focused fund: Currently in regular, switching to direct could save you a lot of money.
- The app provides a calendar indicating the best time to switch, taking into account exit load and avoiding short-term capital gain tax.
- Savings Example: You could save Rs. 1.67 lakhs by switching.
Transitioning to Direct Mutual Fund SIPs
Once you confirm the switch:
- It will indicate that zero commission has been done.
- You just need to go back to the same SIP that you had; your bank is already linked.
- It allows for a one-click purchase to move all your regular mutual fund SIPs to a direct mutual fund SIP.
When to Consider Other Investment Instruments
Once you are comfortable with SIPs, it becomes a normal process. It is a great time for you to consider other timed instruments if you have the knowledge.
Dealing with Lump Sum Amounts
Now, a common question arises: if I have a lump sum amount, how do I deal with that? Timing the market can lead to unfortunate losses.
Example of Lump Sum Investment
For instance:
- On August 28, 2018, you invest a lump sum in a mutual fund.
- By March 27, 2020, when the lockdown was announced, you might need that money.
If you invested at an NAV of 26 and it dropped to 21, you would have lost 20%.
- If invested: Rs. 1 lakh is now Rs. 80,000.
- If invested, Rs. 5 lakh is now Rs. 4 lakh.
This situation can be disheartening.
Strategy for Lump Sum Investment
So what do you think about lump sum treatment? If you receive a lump sum, my suggestion is as follows:
- Invest in a Debt Mutual Fund:
- A debt mutual fund is like an FD with a fixed rate of return, usually higher than an FD but not dramatically so.
- You receive regular income from it.
- Start an SIP:
- For example, if you get Rs. 1 lakh, don’t put it in the market directly.
- Instead, invest it in a debt mutual fund and start an SIP of Rs. 5,000.
- After 10 months, this amount would be spent, and you can continue with your regular income.
Advantages of SIP
SIP allows you to enjoy healthy returns with minimal risk.
- If you put a lump sum at the right time, your returns will be higher than SIP, but avoid that risk.
- Recommendation: SIP is a great way to continue investing with almost zero risk while enjoying healthy returns.
