Enter equity markets through Systematic Investment Plans into Mutual Funds

Equity markets saw a steep correction in September and it is continuing this month as well. Majority of the stocks and sectors stumbled with fears of rupee depreciation against the dollar, rising crude prices, current account deficit and hardening interest rates. Investors are worried. But new investors participating in equity mutual funds through the Systematic Investment Plan are least worried. And the reason is they are only buyers. They buy mutual fund units of equity funds every month. And this correction is best suited for them as they will be accumulating more units. It is proved that SIP investors make the best returns in long term mainly due to two features - Rupee Cost Averaging & Power of Compounding.

I advice investors to go for SIP for their long term financial goals. And generally it would be for minimum 10-15 years. So the first half of the duration is our buying period. We buy at various levels and it is good if markets are volatile. Due to market corrections, we accumulate more units each time when the price of the units is lower. Our purchase price gets averaged to the best possible extent. We may not make any profits in the initial few years. But we accumulate units for future profits. That's called Rupee Cost Averaging.

By this time, the compounding would have started. Markets don't stay low or high always. It moves like a ocean wave in the short term. But if you see the long term, its always a straight line trending upwards. When markets move up, all the units purchased at lower prices suddenly starts growing significantly. Every unit starts gaining phenomenal profits for you. The unit prices would grow 4 to 5 times of the purchase price over a period of time. That's called power of compounding.

Let's take an example of last 15 years. In this period, we witnessed steep market corrections as well as big market rallies. In 2004, when Vajpayee Government lost the elections, markets fell by 842 points. In 2008, from its lifetime high Sensex crashed by 61% in 1 year during the global financial crisis. It bounced back by 157% in 1.5 years from there. In 2010, sensex corrected 28%. And bounced back by 96% in 3 years. There were many such smaller ups and downs in the market. Now again, markets are correcting. The downside from here may or may not be limited. But this too shall pass and markets will bounce back.

In the same 15 year period, Mutual Funds SIPs have delivered more than 15% compounding returns per annum. 15,000 rupees invested every month has become more than 1 Crore when the total investment was just 27 lakhs (over a period of 15 years, not at once). That's 73 Lakhs profits contributed by the market. Your contribution was just 1/4th of the goal. This happened to only those investors who continued their SIPs inspite of big ups and downs. Those who stopped or exited during fearful times burnt their fingers. Those who continued, created wealth.

So, there's no good time or bad time for starting a SIP. But starting a SIP during a volatile period like now is definitely a good time. So rejoice and take a plunge into equity now. Start your SIP into mutual funds today. Have a financial goal, select right mix of mutual funds, keep investing every month, patiently digest volatility and start your journey towards wealth creation. Rest, leave it to SIPs.

Srivatsa Hebbar
Inverika Investment Solutions LLP

Are Mutual Fund Retirement Schemes Apt For You?

Indian millennials are increasingly becoming cautious towards their investment needs and retirement is no longer a forgotten goal. In response to which, mutual fund houses have swiftly added retirement schemes to their offerings. These funds have further aroused investors’ interest due to their inclusion under Section 80C exemptions.  

*Image Courtsey - www.aag.com

But, are these retirement schemes really a good bet for future retirees? Let’s uncover the features of these schemes to understand if investment in these schemes does justice to your retirement goal. 

Mandatory lock-ins and exit load

Mutual fund retirement plans come with a mandatory lock-in period of up to 3-5 years, which is similar to ELSS schemes that have a lock-in period of three years. Moreover, these schemes charge exit load anywhere between 1% and 3% for withdrawals before reaching the age of 58-60. While exit load is stipulated to discourage early withdrawals, yet it makes these schemes less attractive than regular equity schemes or even ELSS. 

Here’s a snapshot of the currently available retirement schemes and their features. 

Higher expense ratio

As evident from the above table, retirement funds carry higher expense ratio than equity schemes, mainly due to low AUM. This makes your cost of investment in these expensive than what it would have been for diversified equity schemes. 

	Exposure to Equities	Exit load	Lock-in	Expense Ratio
HDFC Regular Savings Fund	1) Equity Plan - 80%-100% 2) Hybrid Plan - 60%-80% 3) Debt Plan - 5%-30%	1% till 60 Years	5 Yrs	1.81%
UTI Retirement Benefit Pension Plan	Up to 40%	1% till 58 Years	NIL	2.11%
Franklin India Pension Fund	Up to 40%	1% till 58 Years	3 Yrs	2.49%
Reliance Retirement Fund	1) Wealth Plan - 65%-100% 2) Income Generation Plan - 0%-35%	1% till 60 Years	5 Yrs	2.30%

Returns

Performance of these schemes has been at par with diversified equity funds so far. Also, exposure to equities in these schemes needs to be factored in while comparing returns among them. For example, HDFC and Reliance allow equity exposure up to 100% while UTIl and Franklin have capped it up to 40%. 

	1 Year	3 Year	5 Year	10 Year
HDFC Regular Savings Fund	35.62%	-	-	-
UTI Retirement Benefit Pension Plan	16.72%	10.21%	12.24%	9.11%
Franklin India Pension Fund	11.01%	9.61%	13.09%	8.73%
Reliance Retirement Fund	39.69%	-	-	-

Final take

Clearly, mutual fund retirement schemes have an upper hand over traditional retirement options such as National Pension Scheme (NPS) or insurance pension plans in terms of liquidity and exposure to equities. 

However, given the high rate of expense ratio and extended lock-in, diversified equity schemes are relatively better options to rely on. At the same time, retirement need differs from individual to individual that calls for a more customised plan than a generalised one.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.