SIP Benefit [Good Friendships Key to Success]

The fundamental SIP functioning premise was covered in our previous post.

We're going to talk about how SIP could be beneficial for us right now.

However, before discussing SIP, let's first define the term "mutual fund."

What is Mutual Fund?

Individual investors often purchase individual equities after conducting research and analysis. However, majority of individual investors struggle with stock selection, and retail investors in particular struggle with stock analysis and selection. They also lack the time to do in-depth company research.

For the benefit of individual investors, certain highly qualified stock analysts and fund managers perform this incredibly difficult jobs. 

After a thorough review of each stock, they create groups of stocks. They then obtain funding from the individual investors and purchase those equities on their behalf.

Therefore, there is mutual understanding between the fund manager, who is knowledgeable about the stocks available for investment, and the individual investor, who has funds to invest.

We shall talk about mutual funds in more detail later on.

We shall now turn to our current topic of discussion, the benefits of SIP.

We'll attempt to comprehend it through an illustration.

First, We shall analyses the movement of mutual fund A

if mutual fund A's NAV continuous in uptrend, from Rs. 8 to Rs. 15.5 in two years.

The average NAV cost is then Rs. 11.32 [this is in-between Rs. 8 (Low) to Rs. 15.5 (High)], and using the current NAV of Rs. 15.5 we have made a profit of Rs. 8847.95, or a return of roughly 36.87%. 

Furthermore, if the NAV increases to Rs 16 in the future, the profit would be Rs 9907.57, or 41.28%. Mutual Fund A details shown in below figure 1.

Fig 1. Mutual Fund "A" NAV keep on Uptrend

Second, We shall analyses the movement of mutual fund B

if mutual fund B's NAV keep on sideways, in between Rs. 8 to Rs. 15 in two years.

The average NAV cost is then Rs. 10.79 [this is in-between Rs. 8 (Low) to Rs. 15 (High)], and using the current NAV of Rs. 12 we have made a profit of Rs. 2695.50, or a return of roughly 11.23%. 

Furthermore, if the NAV increases to Rs 16 in the future, the profit would be Rs 11594, or 48.31%. Mutual Fund B details shown in below figure 2.

Fig 2. Mutual Fund "B" NAV keep on Sideways

At last Third, We shall analyses the movement of mutual fund C

if mutual fund C's NAV keep on Downtrend, in between Rs. 12 to Rs. 8 in two years.

The average NAV cost is then Rs. 10.08 [this is in-between Rs. 12 (High) to Rs. 8 (Low)], and using the current NAV of Rs. 8 we have made a Loss of Rs. 4947.73, or the negative return of roughly -20.63%. 

Furthermore, if the NAV increases to Rs 16 in the future, the profit would be Rs 14104.53, or 58.77%. Mutual Fund C details shown in below figure 3.

Fig 3. Mutual Fund "C" NAV keep on Downtrend

We thus do not know which of the three conditions listed above we will experience when we begin investing in mutual funds.

That’s why we need to have stretched investment time frame to cover all types of cycles of uptrend, sideways & downtrend.

If we kept investing even after our investments went through one or two up-and-down cycles, then eventual return would undoubtedly exceed the amount initially invested. 

The greatest magic or beauty, ultimately, is that for earning this return, we need not to do anything special except to do investment only. 

The fund manager and his team will pick the stocks, research the stocks, buy and sell the stocks, and monitor the stocks. 

We just have to keep our patience and keep on investment going on at the up and down times.

Hope you understand and enjoyed the mutual fund up-down journey and the possible return after that up down cycle.

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Disclaimer: This post is not considered a recommendation to buy, sell, or invest in any company; it is just intended for educational purposes. Do your research and due diligence before making any investment, and talk to your financial advisor.