WHEN IN DOUBT, SIP
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.