2. You must have heard this statement more than n
times now that …
“SIP is the best investment style”
So let’s understand why SIP has emerged as the most
powerful style of investing in recent times through
some real life examples….
3. There are basically three points that makes SIP such
a strong concept
Rupee Cost Averaging
Power of Compounding
Market timing irrelevance
Let us simplify these terms in next few slides…
4. Rupee Cost Averaging
To understand this concept more practically look at the illustration below. The SIP investor finishes
with an investment that is worth more than the lump sum investor after six months - even though
the starting price and finishing price are exactly the same. Unlikely but it is true. Check the figures
yourself ….This is the first thing what SIP does; it averages the buying cost automatically.
Month Lump sum Investor SIP Investor
Monthly
Unit Price (Rs.) Amount Invested Units Purchased Units Purchased
Investment
1 20.00 60000 3000.00 10000 500.00
2 18.00 10000 555.56
3 14.00 10000 714.29
4 22.00 10000 454.55
5 26.00 10000 384.62
6 20.00 10000 500.00
Total Invested 60000 60000
Total Units Purchased 3000 3109
Average Price Paid 20.00 19.30
Value of Investment after six months
at current unit price say Rs.20 60000 62180
5. Power of Compounding
This mathematical formula of compounding : FV = PV (1 + r) n is known to all of us but is seldom
understood in terms of investing. Let’s use an example : If you invested Rs. 100000 PV (Present Value) in a
instrument that grows @ 15% per year (the r) for a period of 25 years (the n), its FV (Future Value) will
become Rs.3291895. Unbelievingly the amount multiplied to a whopping 33 times
Now the let’s see how the same compounding plays in a SIP over a period of time. The table below justifies
all statements of the Power of Compounding. A meager amount of Rs. 1000 per month over 25 years at an
annualized growth rate of 15% accumulates to a humongous number of approximately Rs. 33 lakhs
Growth rate of 15% p.a.
Total Amount Value after 25
Saved years
Amount saved per month
5,000 1,500,000 16,420,369
3,000 900,000 9,852,221
1,500 450,000 4,926,111
1,000 300,000 3,284,074
6. Market timing is irrelevant
Data Source : Bloomberg
Let’s look at the above analysis in the next slide whether it actually happens …
7. Time in the market matters; not timing
Data Source : Bloomberg
*CAGR (Compound Annual Growth Rate) -The year-over-year growth rate of an investment over a specified period of time
8. Now that we have seen the Power of SIP; let’s try to
address this point …
“When SIP works best for us”
Few slides from hereon will explain this more clearly
9. SIP will work best if following acts are done:
Start Early
Invest Regularly
Invest for Long Term
Invest in the Right Asset Class
Let’s look at each aspect from a practical angle…
10. Start Early – Let’s flip around and see Cost of Delay
through “Ram aur Shyam ki Kahani”
Ram Shyam
• Starts investing at the age 28 48
• Monthly Investments Rs.5,000 Rs.15,000
• Returns (assumed) p.a. 15% 15%
• Both invest till the age 58 58
• Total investment 18,00,000 each
• Accumulation at 58 350.49 lacs 41.79 lacs
To catch up with Ram, Shyam has two choices
Earn on his investment @ 45% p.a.
OR Save per month Rs. 1,25,000
12. Invest for Long Term
Data Source : Bloomberg
Hence longer your SIP • Lower the risk
• Greater the effect of compounding
Period • More predictable average returns
13. Invest in the Right Asset Class
Undoubtedly Equity is the winner overtime…
14. Now that we have seen why and how SIP can best
work - a question still remains unanswered ….
Can SIP help individuals like you
and me in real life situation to
meet our financial goals ?
Let’s try to answer this question through a simple
case study and see whether benefits of SIP really
work …
15. Case Study – Real Life Situation
• Assume –
– You are 30 yrs of age; have a wife and kid
– Current Annual expenditure of Rs. 5,00,000
– Retirement expected at age 60 yrs
• More –
– Average prices (i.e. inflation) will rise by 7% pa
– After 30 yrs when you retire, the low risk rate of return will be 6% pa
(Considering you put all your accumulated corpus post retirement in a
bank deposit)
– You will live for more 20 years post retirement
So let’s see what will be the corpus required at the time of your retirement
to maintain the same current lifestyle additionally with enhanced medical
expenses
16. Your Target
Current Expenditure
Rs.5,00,000 p.a.
Inflated at 7% p.a. for
30 years
Expenditure at the time of Retirement
Rs. 36,00,000 p.a.
Therefore to generate
this income every year
post retirement you
Income to be generated post Retirement need to accumulate a
Rs. 36,00,000 p.a. corpus
Corpus Required at the Your first reaction
time of Retirement Impossible! It cannot
be achieved.
But then there is a
solution…
17. So what’s the Solution… Just one simple thing
Subscribe for an SIP of Rs.15,000 per month in a good
diversified equity fund for 30 years and forget it
You still don’t believe it that it can be that simple; let us validate our
conviction with actual returns generated in a equity fund over the years
HDFC Equity Fund
SIP Investments 15 year SIP 10 year SIP 5 year SIP 3 year SIP
Total Amount Invested (Rs.) 2,700,000 1,800,000 900,000 540,000
Market Value as on July 29, 2011 (Rs.) 34,379,093 8,682,024 1,427,405 798,522
Returns (Annualised)*(%) 29.87% 29.64% 18.56% 27.29%
Benchmark Returns (Annualised)(%)# 15.87% 18.42% 8.36% 14.08%
Market Value of SIP in Benchmark# 9,967,057 4,737,423 1,110,339 664,982
From the table it is crystal clear that if an investor did an SIP of Rs.15000 per month in HDFC Equity Fund for 15
years, he would have invested 27 lacs and that would have grown to a whopping number of 3.4 crore
as on date; in spite of so many pitfalls in equity markets in last 15 years.
18. Still need to think; No pressure but see this
what the delay can cost in the same case study
Time to
Retirement (yrs) 30 25 15 10
After 5 years After 15 years After 20 years
Investment Required Today from now from now from now
Monthly 15,000 21,000 48,000 80,000
Annual 1,80,000 2,32,000 5,76,000 9,60,000
Current Age : 30 years With every passing year the time to
Retirement Age : 60 years retirement is reducing and increasing
the burden of investment required. Now
Retirement Corpus to be accumulated : 8 cr.
the choice is our whether we want
Assumed Rate of Return on Investment : 15% p.a.
TO START NOW OR STILL WAIT
19. We're here to help
1800-11-0444
rrinvestors@rrfcl.com
www.rrfcl.com
www.rrfinance.com
