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Why your SIP is expensive
Value Research |
June 27, 2006
Systematic Investment Plans just got more expensive. At least six fund houses have decided to charge investors an entry load of 2.25% in SIP investments. Now they are on par with lump-sum investments.
In the past two years, SIPs have seen their load structure change from nil to 2.25%, an undesirable step indeed. So if you were putting Rs 10,000 every month in an SIP and the entry load is 2.25%, only Rs 9,775 will be invested while Rs 225 will be the fee.
SIP is considered to be the ideal way to invest in equity funds. Fund houses always encourage investors to invest via an SIP because that way they can get the best returns. While it is good for investors, SIPs are equally beneficial to fund houses as they can have some idea about regular cash flows, thus helping them to plan investments in advance.
We do believe it's a step that fund houses could have avoided.
Having said that, investors should not base their investment decision only on load. More fees would definitely impact returns in the long-term. But, it is always better to pay a little extra and invest in a good fund rather than give money to a lousy fund just because it does not charge a load. Performance should be the main selection criteria and not the load.
To see how the load affects returns, we take the example of HDFC Equity Fund with data as on May 31, 2006. We assume a monthly SIP of Rs 10,000.
The longer the investment term, the greater the impact of a higher load.
How an SIP works
An SIP allows you to take part in the stock market without trying to second guess its movements. It means you commit yourself to investing a fixed amount every month. Let's say it is Rs 1,000.
When the NAV is high, you will get fewer units. When it drops, you will get more units.
Approx number of units you will get at Rs 1,000
Within six months, you would have 5,894 units by investing just Rs 1,000 every month.