To study the Systematic investment plan as an investment option

Abstract:

This report deals with the study of systematic investment plan as an investment option in mutual
funds. This report gives information relating to mutual funds, types of schemes, systematic investment
plan – need of SIP, how to invest in SIP and benefits of SIP. This is a study of systematic investment
plans offered by different mutual fund agencies and necessity of that in individuals life.

EXECUTIVE SUMMARY:

SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular
saving schemes like a recurring deposit. SIP is having a benefits such as compounding the value, less
instalment, disciplinary investment and less risky as like mutual funds. These will be governed by
SEBI. The study deals with the benefits of SIP, how to invest in SIP, and mutual fund companies
dealing with SIP. The study is done taking UTI mutual fund as an example for the studies and give the
clear importance of the SIP as an investment option.

The study will also include a brief introduction of mutual funds which will help to get a basic
knowledge of mutual funds and then the use of SIP as an investment option in the mutual fund
industry.

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.

Over a long term horizon, equity investments have given returns which far exceed those from the debt
based instruments. They are probably the only investment option, which can build large wealth. In
short term, equities exhibit very sharp volatilities, which many of us find difficult to stomach.
Investment in equities requires one to be in constant touch with the market and a lot of research.
Buying good scripts require one to invest fairly large amounts.

Equity offers superior returns when compared with traditional investments like gold or fixed
deposits. And the sooner you start investing, the higher your returns will be.

Mutual funds:

Mutual fund s a mechanism for pooling the resources by issuing units to the investors and investing
funds in securities in accordance with objectives as disclosed in offer document.

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.
There are various kinds of mutual funds. There are equity funds and debt funds. Further equity funds
can be divided into equity diversified mutual fund where funds are invested in shares of different
companies , sectoral funds where investment is made in shares of some particular sector like FMCG,
IT, Auto, Oil & Gas, Banking etc. Every fund has a NAV (net asset value) which is the value per unit.
It is calculated as the total asset is divided by the number of outstanding units. As the value of asset
changes, NAV also changes.

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.

Schemes according to Investment Objectives:

(a) Growth / Equity Oriented Schemes.

(b) Income / Debt Oriented Scheme.

(c) Balanced Fund

(d) Money Market or Liquid Fund

(e) Gilt Fund.

(f) Index Funds.

(g) Sector Specific Funds / Schemes.

(h) Tax saving Schemes.

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.

What is SIP?

SIP is a way of investing in Mutual Funds. It is designed for those investors who are willing to invest
regularly rather than making a lump sum investment. It is just like a recurring deposit with the post
office or bank where we deposit some amount every month. The difference here is that the amount is
invested in a mutual fund. Mutual Fund makes investment according to their objective .They collect
fund from investor and invests it. Every fund has an objective and pattern of investing.
SIP is designed to make benefits from the volatility of equity markets. When any investment is made
through SIP, the benefits of averaging are gained. Nav keeps on changing everyday and purchasing
units regularly gives a good average cost of the units. In the long term investment through SIP in
mutual funds can give good returns but not to expect huge returns. It is a tool to minimize the risk of
investing in equities through the benefits of regular investments.

Why SIP?  

 Mutual Fund investments are managed by qualified and experienced professionals who have
the expertise of investment techniques, backed by dedicated investment research team.
 
 You can purchase scheme units at a lesser cost as most of the Asset Management Companies
(AMCs) charge less “entry load” (for some scheme even NIL) for SIP investments, as
compared to normal purchases in the scheme.

 SIPs make the volatility in the market work in your favour. Since a fixed amount is invested
more units are purchased when a scheme NAV is low and fewer units when the NAV is high.
As a result, over a period of time these market fluctuations are generally averaged. Thus the
average cost of your investment is often reduced.

 Since you invest regularly, it makes you disciplined in your savings, which leads to wealth
accumulation.  

The SIP reduces the average purchase cost, even in volatile markets with relative ease. When you
invest a fixed amount every month, the number of mutual fund units you actually buy depends on
their market price. Therefore, with the money you invest each month, you can buy less units when the
market moves up and more units when the market moves down.  

This means you are averaging out your cost. If you invest Rs 1000 a month at a price of Rs 20 a unit,
you will have bought 50 units (1000/20). But at a price of Rs 10 per unit, you will have bought 100
units (1000/10). Investing a fixed sum regularly means averaging out the cost, as you get fewer units
when the price goes up and more when the price goes down.

How to invest in SIPs?

 The SIP option is available with all types of funds like equity, income or gilt.

 An investor can avail the SIP option by giving post-dated cheques of Rs 500 or Rs 1,000
according to the funds’ policy.

 If an investor wants to put more than Rs 500 or Rs 1,000 in any given month he will have to
fill in a new form for SIP intimating the fund that he is changing his SIP structure. Also he
will be allowed to change the SIP structure only in the multiples of the SIP amount.

 If an investor is investing in two different schemes of the same fund he can fill in a common
SIP form for all the schemes. However if the first holders in those schemes are different than
they will have to fill different SIP forms, as the first holder has to sign on the form.
  The investor can get out of the fund i.e. redeem his units any time irrespective of whether he
has completed his minimum investment in that scheme. In such a case his post-dated cheques
will be returned back to him.

BENEFITS OF SIP:

Become A Disciplined Investor

Being disciplined - It’s the key to investing success. With the Systematic Investment Plan you commit
an amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof - Minimum
amounts may differ for each Scheme.) to be invested every month in one of our schemes.

Think of each SIP payment as laying a brick. One by one, you’ll see them transform into a building.
You’ll see your investments accrue month after month. It’s as simple as giving at least 6 post dated
monthly cheques to us for a fixed amount in a scheme of your choice. It’s the perfect solution for
irregular investors.

Power of compounding:

Since you invest regularly, it makes you disciplined in your savings, which leads to wealth
accumulation. Disciplined investing is vital to earning good returns over a longer time frame.

SIP helps you to start investing at an early age to meet the greater expenses of your life. Saving a
small sum of money regularly makes money work with greater power of compounding with
significant impact on wealth accumulation.

Reach Your Financial Goal

SIP is a perfect tool for people who have a specific, future financial requirement. By investing an
amount of your choice every month, you can plan for and meet financial goals, like funds for a child’s
education, a marriage in the family or a comfortable postretirement life.

The table below illustrates how a little every month can go a long way.

Monthly Savings - What your savings may generate

Rate of return
Savings per month Total amount invested
6.0% 8.0% 10.0%
(for 15 years) (Rs. in Lacs)
(rupees in lacs, 15 years later)*
5000 9.0 14.6 17.4 20.9
4000 7.2 11.7 13.9 16.7
3000 5.4 8.8 10.4 12.5
2000 3.6 5.8 7.0 8.3
1000 1.8 2.9 3.5 4.2

Take Advantage of Rupee Cost Averaging

Most investors want to buy stocks when the prices are low and sell them when prices are high. But
timing the market is time consuming and risky. A more successful investment strategy is to adopt the
method called Rupee Cost Averaging.

SIP minimizes the effects of investing in volatile markets. It helps you average out your cost by
generating superior returns in the long run. It reduces the risk associated with lump sum investments.
Since you get more units when the NAV drops and fewer when it rises, the cost averages out over
time Thus the average cost of your investment is often reduced.

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.

Convenience and Regularity

SIP gives you the convenience to pay through Axis Bank Electronic clearance service (ECS) or Auto
Debit. You can decide the amount and the mutual fund scheme. A fixed amount will automatically get
debited from your account on a date specified by you.

SYSTEMATIC INVESTMENT IN INDIA

Total AuM: Rs. 549,942 crs (www.amfiindia.com, Dec 2007)

Number of MF Companies in India: 33

75% of the retail equity business comes through the SIP route. In 2005, two years ago the industry
was adding about 10,000 SIPs a month, today the number is 10 times higher. Today SIP inflows are
estimated over Rs. 400 Cr a month. It's not just the salaried class that's investing, small corporate are
also signing up for SIPs

EXAMPLE: UTI mutual fund

UTI Mutual fund is the First Mutual Fund Company in India. It is one of the largest Mutual
Funds in the country. UTI’s Assets under Management: Rs. 56,854 Crs. Wide Range of Schemes for
all Needs – 71 domestic schemes under Various Fund categories. Domestic Schemes & Offshore
Schemes to cater to whole gamut of your investment needs. There are 80 UTI Financial Centres (as
on Nov 26, ‘07). International Representative Offices of UTI are located at London, Dubai &
Bahrain. Strategic Marketing tie-up with 22 PSU Banks, select Private Banks & India Post across
the country.

UTI Systematic Investment Plan

UTI Systematic Investment Plan (UTI SIP) is a vehicle offered by UTI Mutual Fund to help you save
regularly. It is a simple, time-honored strategy designed to help investors accumulate wealth in a
disciplined manner over the long-term and plan a better future for them.

Benefits of investing in UTI

 An early investor accumulates more than the one who comes in later.
 With fresh capital being invested at periodic intervals, the accumulated investment increases.
 Regular small & manageable outflows each month. UTI SIP can be started with as low as Rs.
1000 p.m.
 Hassle-free mode of deduction through salary payments
 Take advantage of equity markets through limited participation thereby minimizing the risk.
 Professional financial advice from AMFI certified advisors
 Automatic mode of savings
CONCLUSION

To conclude, I wish to state that an investor must always be alive to the present situation. Selection of
mutual fund after analysing its track record, investment of some amount regularly in SIP, investment
of maximum amount whenever opportunity arises and finally regular systematic withdrawal /
redemption after a suitable period can prove most beneficial to the investor.
To study the Systematic investment plan
as an investment option

Submitted To:

Prof. Sachi Ponnamma N M

Submitted by:

Uma.Chinchane