Why SIP Mutual Funds?
About two years ago, I began investing a portion of my salary into an SIP Mutual Fund. I chose to invest in an SIP Mutual Fund for two reasons – the first reason was that I was investing for the long term, and so, I could take on a greater amount of risk. The second reason was that SIPs allowed me to make small investments every month, as opposed to a large one time investment (which I didn’t have the money for). I’ve been paying out instalments for 22 months now, and I thought I’d share how it’s working out for me so far.
How Do SIP Mutual Funds Work?
Ok, here’s the short explanation of how SIPs work. When you invest in a Mutual Fund, you are purchasing ‘units’. The cost at which you purchase a unit of a Mutual Fund is known as the NAV (Net Asset Value). When you invest through SIP, you pay a fixed sum of money every month to purchase units. I am currently investing Rs.15,000/- a month into my SIP Mutual Fund.
My Journey So Far
I want you to take a look at the table below:
Upon first glance, it might look like little beetles running through the screen. The key with understanding tables is to look at information, column by column.
First Column: Month
This shows when I started Investing – I began sometime late in October 2015. Since the SIP auto deducts the amount from my bank account during the first week, the Mutual Fund took my first investment to be that of November’s (which is why you won’t see an entry under ‘Amount invested’ for the month of November.
Second Column: Amount Invested
I started out with (and continue to invest) an amount of Rs.15,000/- every month. It is considerable portion of my salary, but I consciously decided on this amount because my spending habits had hit the roof that year. When you divert your salary to savings as soon as its credited, you will automatically have a budget for your expenses.
Salary – Spending budget = Saving,
Salary – Saving = Spending budget.
Such simple, much genius.
NAV & Number of Units Purchased
The action begins! Now, if you rewind you’ll remember that the cost of one unit in a Mutual Fund is its NAV. The NAV of a Mutual Fund changes every day depending on the stocks that make up the Mutual Fund. In October 2015, you’ll see that I made my first purchase of units at an NAV of Rs.23. So, one unit in the Mutual Fund cost Rs.23/- in October. Investing Rs.15,000/-, got me 652 units.
Now, as the months progress (till about February 2016), you can see that the NAV is dipping. 23 became 22, 22 became 21, and so on. In February 16, it stands somewhere around Rs.19/-.If you look at the Number of Units purchased, you can see that it’s increasing.
That’s because the lower the NAV, the greater the number of units your money gets you.
Since I’d just started investing, this was really discouraging for me. I even contemplated stopping the investment, but decided to see how the fund performed for a few more months before pulling the plug.
Boy, am I glad I persevered.
From March, the NAV starts increasing. It goes back to 22 a few times but after January 2017 it’s really shot up. When I invested this month (July 2017), it was Rs.27.
Now, here’s why persevering was worth it:
When the NAV dipped, my investment of 15k was able to fetch me more units. This seemed pointless at the beginning but as the NAV increased, the value of my investment increased because I’d all these units that I had accumulated at a lower cost. If you compare the Total Value column with the Total Invested column you can see that after April 2016, it’s only gone up.
The initial dip in NAV had actually boosted my investment because it gave me more units.
Where I Stand Now
I’ve invested Rs. 3,15,000/- so far, and my investment’s value is around Rs.3,65,000/-. That’s a whopping Rs.50,000/- profit! Also, I was paid a dividend of Rs.13,000/- approx last August – nearly a month’s instalment/investment.
So that’s a total of Rs.63,000/- that I have earned over the course of 22 months.
What percentage of return is that? I’ll talk about how to calculate returns on investment in my next post.