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Investing in micro SIPs


Coins in Piggy Bank

 

This term “micro SIP” came in to existence in 2009, when SEBI relaxed the PAN card requirement norms for investments in SIPs or Systematic Investment Plans where the total aggregate investment made by an investor  in SIPs ( incl. multiple SIPs ) in any financial year does not exceed Rs 50,000/-. For such small investors, a valid photo identity submitted along with the application would suffice.

The idea behind this move was to make investing /saving regularly in mutual funds via SIPs convenient to individuals in the lower income group who do not fall in the income tax bracket, have never filed returns and hence do not possess a PAN Card. Then, mutual funds went a step further to tap this segment and the people in the rural and semi urban areas by reducing the minimum monthly amount requirement for an SIP. Till a few years ago, the minimum investible amount used to be Rs 500/- for a minimum of 6 months, and is now Rs 100/- and a few fund houses have SIPs starting with as low as Rs 50 every month!

While the advantages of micro SIPs are obvious- low entry amount, reduced documentation for investment and access to equity markets to the economically weaker sections of the society, it is important to know the flip side or the drawbacks of such schemes-

 

  • A lower amount every month does not mean lower risk. All SIPs work on the rupee cost averaging concept. (Click on the link to know more – https://srirakshafp.com/2012/03/27/understanding-the-rupee-cost-averaging-concept/ ). An SIP with an investment amount of Rs 50 per month is also subject to the same volatility and market risk as an SIP of Rs. 500 or Rs. 5000 per month.
  • All mutual funds charge an entry or exit load or a regular fund management fee. For SIPs, it is usually a percentage of the SIP installment amount, subject to a minimum amount.  If the value of an SIP is too less, say Rs 100 or Rs 50, a huge chunk of the investment- in percentage terms, could just go towards servicing these charges. So, it is advisable to find out the charges levied before starting a micro SIP.
  • The main objective of a systematic investment plan is to build wealth over the long term to meet specific objectives like retirement, kids’ education or marriage etc. An amount of Rs 100 invested for 5 years – would mean a total investment of only Rs. 6000 over 5 years! This would hardly be sufficient to meet any such goal.

Summarizing, low value SIPs, given all their advantages and features, should be opted for only by people who genuinely cannot invest a higher sum, but would still want to participate in the equity markets growth via SIPs… Those investors who can afford to invest a reasonably higher sum, should not opt for these.

 

 

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