Photographs: Dominic Xavier
Often, systematic investment plans (SIPs) are criticised for the slow pace at which they add to one's wealth. SIPs are a 'slow and steady' story to win in the long term. When the markets slumped from 21K to 7.7K levels, the lumpsum investors pumped in at its peak saw a greater part of their investments in the red.
An investor who continued to invest undeterred even during such turbulent times is all smiles now, for investments made during the 7.7K-10K range are already yielding huge profits.
SIP-ing your way to wealth
SIPs are essentially a longterm story -- one should not be looking at equity if the investment time frame is less than 3-5 years. An SIP is often misunderstood as an investment avenue by itself. Actually, it is only a mode of investment, ideal to invest in equities given its inherent volatility.
An SIP is a replica of the cost averaging theory that we studied in high school. The objective of using SIPs is to buy less units at market peaks and lower at market troughs. Here is an example of how patience pays over a 5 year timeframe:
Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.
Trying times make you tough
Photographs: Uttam Ghosh
When all is well, there is absolutely no need to insulate oneself against a downtrend, given that the equity markets have scared us in the past and will continue to do so in the future as well. For an SIP to deliver the goods, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, ie he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time.
The equity market cycle is normally between a 3-5 year horizon; there could be sharp intermediate glitches as well over such a period. Hence, looking at the mentioned horizon will ensure that we have had a rollercoaster ride over the market cycle and at the same time, continued to invest across all the slumps to average our cost effectively.
For one of the funds mentioned above -- Reliance Growth, we have the following data:
As one can evidently see, the highest number of units are bought at the highest point of NAV and vice versa. This grossly averages the cost. This principle is called Rupee Cost Averaging. While the popular belief is that SIPs are used to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to 'time' the market downturn.
Discipline and diversification
Photographs: Dominic Xavier
Post the IPL matches, if there was one lesson the teams learned, it was to start scoring right from the beginning. The Deccan Chargers kept their scoreboards ticking and did not wait for miracles to occur. This is precisely what one should be doing with investments too. Disciplined investing habits, however hard to stick to, are one helluva hasslefree method to create wealth in the long term.
It is high time one stopped speculating on investments and worked towards employing ones where money in the right avenues produce the right results. To achieve the best risk-adjusted returns, it becomes absolutely necessary not to put all your eggs (money) in the same basket. Having a judicious mix of debt and equity is equally important while you embark on the journey to riches.
We leave you with a passing thought -- most of the systematic investment magic is seen only at the end, so it's time you gave the systematic route of investments a thought.
SIPs are especially useful when we are in a market situation like today. Most of us are bullish about the medium-long term growth story; however, the market has run up quite sharply. We are a little unsure whether to invest money now, lest we end up investing at a market peak. With a year of economic downturn behind us, a systematic invest is likely to yield good returns over the next 2-4 years -- so go ahead and start your long term SIP.