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Systematic Investment Plan or SIP is a procedure by which an investor invests a fixed sum of money in the units of mutual funds. SIPs have begun to attract investors in Nepal due to their sheer simplicity and ability to compound money over a period, passively for those who don’t wish to tame their portfolio.
How Systematic Investment Plans (SIPs) Work
Systematic Investment Plan involves investing a ‘fixed’ amount of money at fixed intervals like monthly or quarterly where you can start investing from a minimum of NPR 1,000. This money is used to purchase units of a mutual fund scheme implying that the more you pay the more units in the mutual fund scheme you will receive over time, and the amount of units is determined by the Net Asset Value (NAV) of the mutual fund scheme.
Rupee Cost Averaging (RCA) is an investment technique where an individual invests a fixed amount of money at regular intervals, regardless of the market's ups and down. In simple terms, it is a Systematic Investment Plan (SIP) which has the potential to help investors build wealth. In this process one buys more units of a mutual fund when prices are low and fewer units when prices are high. Over time, this strategy aims to reduce the impact of market volatility on overall investment. Further, Compounding is the process of ‘earning interest on interest’. It is the process where returns on an investment, such as interest or dividends, are reinvested to generate additional earnings over time. Reinvesting the earnings to earn more interest supports a steady growth of funds, helping you achieve your goals and build wealth over time.
Advantages of SIPs
1. Power of Compounding
Compounding happens when the returns on the investments you made start earning returns. This is a simple concept, but its practical applications are substantial. With regular investments through SIPs, your returns can also get reinvested. With the passage of time, this results into a snowball effect, which increases the potential returns multiple times. An ideal way to maximize the gain is to invest for an extended period. This is also one of the benefits of SIP, wherein you can benefit by investing as early as possible.
2. Rupee Cost Averaging
Rupee cost averaging is a concept wherein you purchase a higher number of units when the Net Asset Value (NAV) of a fund is low and a lesser number of units when NAV is high. Essentially this benefit of SIP ensures that the cost of purchasing mutual fund units averages out over the tenure of the tenure of the SIP. You do not have to worry about how to time the market if you are investing through SIP and this is one of the key benefits of SIP investments.
3. Disciplined Savings
Systematic Investment Plans (SIP) involve regular usually monthly investments being made into a mutual fund scheme of your choice. On the one hand, this ensures that you develop a habit of saving money, on the other hand, you are better placed to make your money grow over time by staying invested in a market-linked investments that has the potential to beat inflation. While other investments like recurring deposit can also help inculcate a habit of saving, the potential of mutual funds to generate inflation-beating returns are an advantage that is not available with many other investments. For better understanding of how long term descipline investments can help grow your wealth, use an SIP Calculator.
4. Convenient Investment Method
Another advantage of SIP is that it is a convenient way of investing. Even if you may not be able to find time for extensive market research and analysis to time markets, SIP investments will happen automatically. So, once you choose a fund, you can just give standing instructions to the bank or use other digital payment mediums and the monthly SIP will be deducted automatically so that your never miss out on an investment opportunity.
5. Flexible Investment Amount
One of the key benefits of SIP over lump sum investment is that you can choose to invest in mutual funds through SIP, with just Rs 1000 every month. This is an affordable way to invest monthly, without hurting your wallet. You can also increase the number of monthly investments with a rise in your earnings via contacting the Fund Manager and filling out a SIP amendment form. Additionally, there is no limit to the number of SIP or mutual funds you can invest in at the same time. This is how the SIP investment strategy can help reach investment goals faster.
6. Flexible Investment Tenure
Another benefit of SIP is the flexibility you have with respect to investment tenure. There is no limit on how long you can continue making systematic investments into a fund.
This flexibility to keep investing via SIP for as long or as short a time as possible is not available if you are making lump sum investment in mutual funds.
7. Professional Fund Management
SIPs provide access to professionally managed mutual funds, where experienced fund managers make investment decisions for you based on in-depth research and market analysis.
8. Diversification:
SIPs allow investors to diversify their investments across different asset classes and securities. By spreading investments across a range of instruments, such as stocks, bonds, and fixed income instruments investors can reduce the risk associated with investing in a single security or asset class.
Disadvantages of SIPs
Market Risk:
SIPs are exposed to market risks, and the value of investments can fluctuate based on market conditions. If the market experiences a downturn, the value of investments made through SIPs may decrease, potentially resulting in temporary losses.
1. Limited Control:
SIPs offer limited control over the timing and pricing of investments. Investors have to adhere to the predetermined investment schedule, which may not align with their personal financial circumstances or market expectations.
2. Possibility of Missing Gains:
Timing the market involves buying and selling investments at the best possible time based on how the market is performing. This strategy is usually suggested for experts who understand the know-how of markets. However, beginners who usually invest in Systematic Investment Plans (SIPs), invest regularly at specified intervals, no matter how the market is doing. This means you don’t get to choose the perfect time to invest based on market trends. As a result, you could miss out on the right time to strike rich.
3. Over dependence on Fund Manager:
In the case of mutual fund SIPs, investors rely on the expertise and decision-making of the fund manager. If the fund manager's performance declines or if there are changes in the fund's management team, it can impact the overall returns generated from the SIP.
4. Exit Load and Lock-in Periods:
Exit load refers to the charges the mutual fund company charge at the time of redeeming your mutual fund units before the end of a particular period of time. The duration between which you cannot redeem your units otherwise you have to pay exit loads is known as the lock-in period. Due to these restrictions, mutual funds investment becomes unattractive for sudden withdrawal. These charges significantly reduce your returns.
Example of a SIP
For example, you begin an SIP with NPR 2000 per month on a mutual fund that yields an average of 12% per annum. After 1 year, you are going to invest NPR 24,000 and you may expect that the value of your investment can be equivalent to about NPR 25,560. In the tenure of more than 5 years, with a total invested amount of NPR 120,000, the amount can reach about NPR 162,000. Having invested a total of NPR 240,000 for the same length of 10 years, the compounded return, the value may well go up to about NPR 470,000s. This case also demonstrates that a steady investment and reinvestment process can greatly increase wealth in the long run.
What Are the Costs Associated With SIP Investments?
Expense Ratio:
Mutual funds have an expense ratio which is an annual fee that typically falls upto 1.5%of the funds’ net asset value and which includes the administration and operational costs of the fund. It is then subtracted from the total assets of the fund and thus reduces the total returns you get. A lower expense ratio usually offers the investors a favourable feature since it retains more of the returns. However, it must be pointed out that actively managed funds usually attract higher fees as a result of their operation, and are more costly than index funds, for instance.
Entry/Exit Load:
There are generally two categories of costs which mutual funds can use— an entry fee, which is the amount paid when investing in the mutual fund and an exit fee which is charged in case of withdrawal of the invested amount before a certain time timeframe.. For instance, if you redeem from a fund with an exit load you will incur a certain percentage of the redemption amount as charge. This is meant to avoid situations where people invest just to cash in within a short while, thus keeping the investors committed for longer periods.
Bank Charges:
When organising an SIP, there can also be small charges from the bank as a result of auto-debits or standing orders. These fees are again mostly small and might differ from one bank to another. Some may be for processing, or more specifically in relation to your SIP, transaction fees or charges per instalment. However, these are normally small charges and it would be wise to check with your bank on the amount you will be charged each time you set up the automatic payment for the fee.
What Returns Can I Expect From SIPs?
When selecting an SIP, one can invest across mutual fund categories using risk-return characteristics of the fund as a guide. Equity mutual funds supply higher returns but are riskier and more unpredictable and depends upon market movements ; thus, they are ideal for long-term investors willing to take big risks. Debt mutual funds as their name implies investing in bonds and fixed income securities that are less risky, but returns on this are lower as compared to equity funds; however these are less risky as compared to equity fundsthese are ideal for conservative investors. Debt and equity funds are moderate risk hence, best suited for investors with diverse portfolios seeking moderate risks.
FAQs
Is SIP good for the long term?
Yes, SIPs are ideal for long-term investing as they allow you to benefit from compounding and reduce the impact of market volatility.
What is the average return in SIP?
The average return for SIPs depends on the mutual fund performance typically offering returns of 10%–15% per year over the long term.
Can I Start a SIP With a Small Amount of Money?
Yes, you can start a SIP with as little as NPR 1000 per month, making it accessible for most investors.
Can I Pause or Stop My SIP Investments?
Yes, you can pause or stop your SIP investments at any time by notifying your Fund Manager .
Is SIP risk free?
No, SIPs are not risk-free, as they are subject to market fluctuations, especially if invested in equities
Insights and Learning
- Mutual Fund Nepal
- What are the Types of Mutual Funds
- Why You Should Invest in Mutual Funds
- Mutual Fund: Advantages and Disadvantages
- What are the requirements for mutual funds?
- How does Mutual Fund work in Nepal
- How to Invest in Mutual Funds in Nepal?
- What is Open Ended Mutual Fund
- What are Closed Ended Mutual Funds
- Investment Modes in Mutual Funds
- What is NAV (Net Asset Value)?
- Why Mutual Funds are Better Option than Any Other Investment Vehicle
- What is Systematic Investment Plan (SIP)
- What is Lump-Sum Investment
- What are the Differences Between SIP and Lump-Sum Investment
- How does mutual fund work in share market in Nepal
- Best Open Ended Mutual Fund in Nepal
- What is the process of SIP Investment?
- Benefits of SIP in Nepal
- SIP in Nepal
- How to buy SIP in Nepal
- How Do I Calculate My SIP Returns?
- How to Cancel SIP?
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