The sim­plest way to id­iot-proof your eq­uity in­vest­ments


Neil Parag Parikh Chair­man & CEO, PPFAS Mu­tual Fund SIP av­er­ages out the pur­chase cost rather than lock up money at a par­tic­u­lar NAV, as in the case of lump sum in­vest­ments” Vidya Bala Head, re­search, Fund­sIn­dia “SIP en­sures in­vest­ments aren’t hurt too much by mar­ket falls. You con­vert mar­ket fall into in­vest­ment op­por­tu­nity by buy­ing more units

Given that the Sen­sex, the broad eq­uity mar­ket in­di­ca­tor, is near its life­time high of 30,000, the dilemma be­fore most in­vestors is: where will it go from here? Is the growth for real and will it take the Sen­sex higher, or is it a bub­ble and likely to burst? Those who missed the cur­rent rally must be won­der­ing if it’s the right time to en­ter the mar­ket or if it makes bet­ter sense to wait till the mar­ket cor­rects it­self be­fore in­vest­ing.

In­vest­ment gu­rus have al­ways cau­tioned against try­ing to time the mar­ket. Any­time is a good time to in­vest in eq­ui­ties, pro­vided that you are in­vest­ing for the long term.

If, re­gard­less, you are tim­ing the mar­ket, then in­vest­ing all your money at one go can be dis­as­trous. Also, if you don’t have the knowhow to di­rectly in­vest in stocks, it is bet­ter to in­vest in eq­uity mu­tual funds through sys­tem­atic in­vest­ment plans (SIPs).

As the name it­self sug­gests, SIP in­volves in­vest­ing a fixed sum of money on a par­tic­u­lar date at monthly, quar­terly or yearly in­ter­vals, the monthly SIP be­ing the most pre­ferred op­tion. SIPs af­ford cer­tain ben­e­fits:

Ru­pee cost av­er­ag­ing: As in­vest­ments in SIPs are stag­gered over time, you con­tinue buy­ing mu­tual fund units ir­re­spec­tive of ups and downs in the mar­ket. Given that you are in­vest­ing a fixed sum ev­ery month, you end up buy­ing more units at lower prices when the mar­ket is at a low and lesser units at higher prices, which ul­ti­mately re­duces the av­er­age price of units. Over­all, it ends up in higher re­turns when the mar­ket goes up.

How­ever, if you make a lump sum in­vest­ment when the mar­ket is at a high, the value of your in­vest­ment gets eroded with the next mar­ket dip as you would have in­vested at a higher price. How­ever, if you make a lump sum in­vest­ment when the mar­kets are at their low­est point, you stand to make higher gains than you would through SIPs. But then it is dif­fi­cult to de­ter­mine when the mar­ket is at its low­est.

In­vest­ing small amounts: SIPs al­low even the small in­vestors to pur­chase eq­uity mu­tual funds as the min­i­mum in­vest­ment in most funds is as low as Rs 500. The pe­ri­od­ic­ity of the SIP can be se­lected on the ba­sis of one’s cash flow, and changed with change in in­come. An SIP helps you grow even a small in­vest­ment into a large cor­pus thanks to the power of com­pound­ing. The trick is to start early.

Dis­ci­plined in­vest­ing: SIP in­stils in­vest­ing dis­ci­pline as the amount to be in­vested is de­ducted au­to­mat­i­cally from a bank ac­count. How­ever, it’s no magic for­mula, only an ef­fi­cient way to ac­cess eq­uity mar­kets. There is al­ways the risk of neg­a­tive re­turns from a wrong fund cho­sen or from in­vest­ments made for the short term. Keep your ex­pec­ta­tions re­al­is­tic and your dis­ci­pline in­tact, and the SIP could well be your road to un­lim­ited riches.

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