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 It's
siplicity personified, and that's no typo. A Systematic Investment
Plan (SIP) scheme-a mutual fund type rapidly gaining currency-is
all about investing in a systematic and regular manner so as to
build wealth over a longer period of time, just what father would
have prescribed. As for the details-any self-respecting brochure
from a mutual fund will tell you all you need to know-suffice it
to say that you can enroll for a sip for as low as Rs 500, and choose
a periodicity of your convenience, monthly or quarterly. SIP, in
effect, isn't very different from a recurring bank deposit. Only,
part of the money goes into equities which, despite the volatile
markets, do ensure higher returns over a longer period of time.
The mechanics of SIP: Since sip involves investing
a fixed sum of money at regular intervals, the number of units an
investor buys is a function of the prevailing net asset value (NAV).
Units typically start with a NAV of 10, and this increases or decreases
depending on the appreciation or depreciation of the assets under
management. Thus, when NAVs are low, an investor gets more units
for her buck and when NAVs are high, she gets fewer units.
How SIP beats the market: Take the case
of an investor who invests Rs 1,000 a month for six consecutive
months in a sip. When the markets go up, so does the NAV, and she
gets fewer units. When the markets go down, the NAV follows suit,
and she gets more units. Thanks to this 'rupee cost averaging' as
fund managers term it, an individual who picks a sip scheme will
always be better off than one who opts for random investments in
mutual funds (See How Sip Scores). How? Her average cost of acquisition
(of the units) will always be lesser than someone who does so at
random.
Who should pick SIPs: SIP is a good
investment vehicle for all retail investors, but it is ideal for
those who can't make huge one-time investments. It is also suited
to those investors with a predilection for equity and balanced funds;
the price volatility in such schemes actually works to their advantage-in
contrast, the NAVs of debt funds don't fluctuate all that much.
But if you're the kind in search of quick returns, sips are definitely
not for you.
The benefits of SIPs: Most retail investors
lose their shirts trying to time the market. SIP provides investors
with a vehicle that can help them leverage the volatility of the
market to their advantage without the risks inherent in such an
effort. Then, there is the fact that investors don't really have
to track their investments. If the markets are rising, investors
receive fewer units. The rupee cost averaging works in favour of
retail investors over time. Finally, sips promote disciplined investing.
SIP caveats: Investors would do well
to stay invested in a sip for some time. Only then will market volatility
work to their advantage. We'd recommend a minimum period of a year
at the least. Investors should also pick the right sip-past performance
and lineage are important. Most mutual fund companies offer a sip
option on their entire portfolio of schemes. So, refer to a mutual
funds scorecard (such as the one in this issue of BT) and get a
move on.
TAX SWIPE
Systematic Withdrawal Plans (SWPs) could
help investors live down Budget 2002. |
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Yashwant Sinha's rollback act has not
touched on the tax on mutual fund payouts. That's bad news
for investors in debt funds who earned dividends in excess
of 12 per cent over the past two years. This year, though,
a more stable interest rate regime-as a rule, returns from
debt funds are inversely proportional to movements in interest
rates; if interest rates dip, returns increase-and the tax
on dividends could see post-tax yields slimming to 7 per cent.
The escape route? Something called Systematic Withdrawal Plan
(SWP), a popular investment option in other parts of the world.
Here's how this works. Let's assume an
individual invests Rs 1 lakh in a fund with an NAV of Rs 10.
The fund earns 10 per cent in the course of the year and its
NAV touches Rs 11. In the normal course of events, the fund
would distribute the 10 per cent as dividend and its NAV would
come down to Rs 10 again. That means our investor would earn
Rs 10,000. Under the new tax regime, he would pay Rs 3,150
of this as tax.
How does SWP work? At the end of the
year, the fund simply offers the investor the option of redeeming
the number of units equal to the dividend he would have earned.
Thus, the investor in the previous example would have had
the option of redeeming 909 units (at an NAV of Rs 11, that
works out to approximately Rs 10,000). The SWP is cash-neutral
for both the investor and the fund. But it reduces the investor's
tax liability. Since his gain is a mere Re 1 on every unit,
his tax liability will be 31.5 per cent of Rs 909 (he withdraws
909 units), or Rs 286. Still better, we've assumed a tax rate
of 31.5 per cent (short-term capital gains). If investors
hold their units for over a year, the tax rate will be a maximum
of 10 per cent.
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