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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.

3-year SIP 

Entry load

Return (%)

Value (Rs)

Nil

48.52

6,79,922

1%

47.67

6,73,190

2.25%

46.64

6,64,960

5-year SIP

Entry load

Return (%)

Value (Rs)

Nil

52.50

20,28,317

1%

52.03

20,08,235

2.25%

51.46

19,83,684

10-year SIP

Entry load

Return (%)

Value (Rs)

Nil

38.46

90,78,587

1%

38.28

89,88,700

2.25%

38.04

88,78,814

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.

Date

NAV

Approx number of units you will get at Rs 1,000

Jan 1

10

100

Feb 1

10.5

95.23

Mar 1

11

90.90

Apr 1

9.5

105.26

May 1

9

111.11

Jun 1

11.5

86.95

Within six months, you would have 5,894 units by investing just Rs 1,000 every month.

Value Research

 




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Number of User Comments: 10




Sub: Here the clarification

dear Herjeet, When the market is good and the value of NAV is increased,you get less number of units.But the market is collapsed and the ...


Posted by Harish





Sub: sip querry

sir/madam as ginven in the example(SIP) i want to know how it is possible that every time a person investing in sip the unit price ...


Posted by ramesh chandra sharma





Sub: A list of Funds that offer SIP

Can u list the name of fund houses that offers SIP ? I believe all fund houses do not offer it.


Posted by Selvaraj





Sub: SIP a looser

Actually now the Fund houses have started minting money. There is no term as free lunch. First they attracted people by showing the attractive returns ...


Posted by Adnan





Sub: SIP

This is another method to cleverly fool the customer.Even if the NAV increases you get less return and if NAV decreases you are fooled and ...


Posted by herjeet




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