Sunday, February 5, 2012

SIP in mutual fund to create wealth

 

THERE are different ways in which a systematic investment plan (SIP) can be implemented. However, the investors are often in a confused state due to the different methods used by various fund houses for processing SIP. This leads to a situation where the investor is not sure of the way in which the position can be tackled. Here is a common way in which the entire SIP investment gets disrupted, and how to tackle this position.

Structuring the investment: The process of investing in a SIP consists of two steps. The first one involves starting the investment, followed by the specified number of instalments to complete the entire process. In this regards, the choice of the time period for the purpose of the entire exercise is important as it determines the number of instalments that will be paid and the total amount that will be invested. Thus, there can be different time periods chosen by various investors. Some would go for a six-month period, while others can go for a longer time period of over three years.

Once this is determined, then the next step will be to complete the transaction. In most cases, the investment will consist of the initial investment, followed by the remaining instalments of the transaction. So, for example, if there is a six-month investment, then this consists of the first investment followed by the five further instalments.

Difference: There is a need to distinguish the two parts of the investment because in most cases the process is started by the first investment resulting in a situation where the investor submits the required form and other details of the SIP with the initial part of the investment. The remaining parts then just ensure that the process is completed and consists of similar amounts of payments.

Often, the two modes are made using different routes. So, there would be a cheque used for the first instalment like the use of the ECS for the remaining part. This facility is made available by the mutual funds for the convenience of the investor.

Amount: Now, there are different policies that are followed by different mutual funds. The issue in is whether the instalments will have to be of the same amount right from the first one to the last one. One point of view is that the initial investment is just a process to open the account and start of the investment process, so, there should not be any problem if the figure differs with the other instalments. For example, if the initial investment is of say Rs 25,000 and the other investments are of Rs 20,000 each, some funds accept this position, while many others do not. Hence, investors might not be able to do this with all funds.

The other view holds that there is just a single transaction that covers all the investments into the various parts of the SIP , so, there has to be a single figure that is common across all the investments. In this case, the initial part of the transaction is just the first part of the entire process.


So, this will need to be the same as the other details.


In the example above, it means, all instalments, including the first of Rs 25,000 each. Investors would do well to ensure that they follow the process of ensuring that the investment amounts are similar to avoid any confusion.

 

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