MIP - SIP in Mutual Funds

As the markets are trading at high levels, we recommend investors to invest systematically in equities at different levels every month. For example if you have lump sum amount to be invested, then invest it in MIP and the returns that is generated from MIP should be invested in Mutual Fund SIP.

MIP in Mutual Funds will give approximately 12%-15% returns annually (returns given in last 5 years). SIP have the potential of giving returns of 20%-25% annually as per our study of funds for last 5-10 years.

For example: If one invests RS. 5 lakh in MIP, he can expect a return of Rs. 5000 p.m. at 12% every month from that MIP. He should Start Rs. 5000 SIP every month for next ten years.

Thus, after 10 years his investments in MIP will be Rs. 5 lakh + his investments in SIP will be Rs. 5000*120 months, i.e. rs. 6 lakh.

The SIP schemes that we recommend, have the potential of fetching around 20%-25% return annually. The returns are as per our research and are available on reputed websites such as on www.valueresearchonline.com.

Thus at the end of the tenure, i.e. after 10 years, the investment amount will be as below:








When equity markets are in the midst of a rally, a lot of investors are invested mainly in equities/equity-oriented funds. As a result, they end up with equity-heavy portfolios with little or no allocation to assets like debt/fixed income. When equity markets turn volatile, investors are often caught wrong-footed with their bloated equity portfolios. In such a market scenario, the debt component of the MIP can stabilize their portfolios.

What are MIPs?
MIPs invest predominantly in debt instruments with a small portion of assets allocated to equities. The equity component provides MIPs with just the edge it needs to outperform conventional debt funds. The equity component usually varies between 5%-30% of assets.

A noteworthy feature about MIPs is the wide range of options available to investors. MIPs can be segmented based on their equity allocations; for example conservative MIPs invest 5%-15% of their corpus in equities, while moderate MIPs invest 15%-20% of their corpus in equities and the aggressive ones invest 20%-30% of their corpus in equities (the three categories should not be taken as an industry standard, they have been defined for a better understanding of how MIPs are structured). Effectively, MIPs provide investors with the opportunity to invest in line with their risk appetites.

What is Systematic Investment Plan (SIP)?
SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a MF by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in an MF. Thus, you can invest in an MF without altering your other financial liabilities. It is imperative to understand the concept of rupee cost averaging and the power of compounding to better appreciate the working of SIPs.

While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years.

1. Discipline
The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundreds every month, rather than set aside a large sum for investing in one shot.

2. Power of compounding
Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. Let’s explain this with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a corpus of Rs 12.23 lakh while person B’s corpus was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-corpus. That difference is due to the effect of compounding. The longer the (compounding) period, the higher the returns.

Now, instead of investing Rs 10,000 each year, suppose A invested Rs 50,000 after every five years, starting at the age of 35. The total amount invested, thus remains the same -- Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.

3. Rupee cost averaging
This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.

People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.

4. Convenience
This is a very convenient way of investing. You have to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one’s account and will send the confirmation for the same.

5. Other advantages
• There are no entry loads on SIP investments.
• Capital gains, wherever applicable, are taxed on a first-in, first-out basis.

Source: www.moneycontrol.com; www.personalfn.com; http://www.valueresearchonline.com/.

Document Prepared by: Mr. Nimesh Marfatia (Director – DENIP Consultants Pvt. Ltd.)