Use SIPs correctly
Use SIPs correctly
A systematic investment plan, or SIP, is a
popular method of investing in equity funds. This idea of disciplined investing
has been marketed successfully. The biggest merit of a SIP is that it allows
one to invest regularly without thinking about about the right time to jump in.
However, based on interactions in our workshops, we find that some investors have
not understood the use of SIP as a tool for fulfillment of long term goals and we put down some thoughts on using SIPs correctly.
1) First, SIP is only an investment process, a method of
investing. Instead of timing the market - trying to invest when you think the market
is undervalued and will rise, SIPs facilitate a participation in the market
through ups and downs.
Since a fixed amount is invested regularly
over time, SIPs enable averaging the cost of investment over a period. The
returns from an SIP are not likely to be different from those of the mutual
fund in which the investment is made. Investors must note this. The
returns will depend on how the fund has performed.
2) Second, SIPs are all about disciplined investing; enabling a
systematic and consistent approach to investing savings. If you are a
salaried person with a regular income and monthly saving, SIPs are just the
thing for you. You invest something every
month when you can save, whenever you have a lump sum, you can put it to work
too. Maintaining discipline is the key to successful SIP investing. Without an
SIP i.e. without this discipline of regular investment - you may not have
participated in the down market. Those who kept SIPs going over the last 3-4
years have benefited greatly in the recent run-up.
3) Third, SIPs
work best when the investment is made with a goal - a long term goal in mind.
Assume that you have a goal in mind to save an X amount for retirement,
the money most likely will not accumulate by random or accidental investing.
With the goal in mind before the investment is made, we are clear about
the product we want to invest in, the amount and the period of
investment. The goal will ensure the discipline required to put away the
amount regularly and the best way to do so is by way of regular SIP in equity
mutual funds.
The markets have risen sharply over the last few months. Many investors ask - " Is is too late to start now?" or "Should I now discontinue Equity SIPs?" With the goal as the predominant factor in your mind, along with your asset allocation, such questions wont arise. You are not timing the market, you are investing for a long term goal, clear about the fact that equity investing is beneficial over the long run.
Many get discouraged in a bear market and have discontinued SIPs then. Note that money moves with the market in an SIP, and when one leaves and re-invests via SIP at will, one is trying to time the market and often this leads to buying at peaks and selling at lows. This defeats the very purpose of an SIP.
4) Fourth, SIPs will benefit you only over the long run. Over the
short term, an SIP investment may go down in value. The benefit of SIP
investing can be measured across market cycles - i.e periods in which markets
go up and periods in which the trend is down. If you invest via an SIP as the
markets are moving up, obviously the market value today will be higher since
you have invested at lower levels, and the total value of your investment will
be higher than cost.
However, assume your SIP installments have
been in a period of a falling market, the value of your investment today
will be lower than cost! SIPs work best if you persist across cycles - periods when the markets are
going up and down.
5) Fifth, It is futile to compare lump-sum investments and SIPs.
They are two different ideas. If you invest a lump sum amount at the beginning
of a goal period, the whole amount naturally works for a longer time. SIP
investing is a completely different idea where you build wealth slowly with each installment and really
useful for those with regular incomes like salary.
If you have a lump sum, and wish to invest
for a goal as per your asset allocation, go ahead and do it. When you
invest a lump sum, a larger chunk of your money works for a longer period of
time.
6) Finally, I see some people advocating SIPs in debt funds and feel this is
not efficient. Income is accumulated steadily when one invests in debt and
there is no point investing little drops. If you have a big sum and wish to get
an income at the market rate, invest the whole amount and not in
trickles.
SIPs are meant to give you
a disciplined approach to investing. Invest in SIPs with a goal in
mind and cut out all the other noise and comparisons with lump sum etc. An
SIP in equity WILL always be subject to market volatility but SIPs have done
well for investors over the long run. Maintain your discipline and
accumulate wealth using SIPs.
