Diversifying in gold through systematic investment has many advantages.
Usually people think about a Systematic Investment Plan (SIP) in connection with a mutual fund investment. Now, gold is an attractive investment avenue. The return generated by it is better than in many other investment classes. A proven method of investing in gold is by way of an SIP. Investors need to understand what is an SIP and what is the benefit of one in gold.
An SIP means investing regularly on a daily, monthly, quarterly or yearly basis. Doing so will get you the benefit of averaging the cost and not being bothered by ups and down in the prices. When the market is up, you will buy less units and when the market is down, you will buy more units (this will help in averaging our price). It is a good tool for a disciplined method of investing.
When the markets are falling, it’s a good time to buy. But when prices are falling, its psychologically difficult for investors to make a buy decision. Contrary to this, when the markets are booming, many investors put in more money, in expectation of a further rise. An SIP ensures you buy more when the markets are falling and less when it’s peaking.
When you make a lump sum investment, you may do so when the prices are high. If the market dips after that, the value of your investment falls and you may have to wait a long while to make a return. But if you invest via an SIP, you do not lose by buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time. Over time, your chances of making a profit are much better when compared to a one-time investment.
An SIP usually reduces the average purchase cost in even volatile markets with relative ease. When you invest a fixed amount every month, the number of mutual fund units you actually buy depends on their market price. For example, if you invest Rs 10,000 a month at Rs 2,000 a unit, you will have bought five units. But at Rs 1,000 per unit, you will have bought 10 units.
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PLUSES
There are advantages to being a disciplined investor. Investing regularly via an SIP, even if these are small amounts, offers many benefits like: # Investors get benefit from an investment principle called rupee cost averaging;
# An SIP gives us the power of compounding the returns;
# SIPs inculcate the discipline of savings regularly. It is a convenient mode of investment as well.
# SIPs serve as a good tool to counter inflation
| TRYING DIFFERENT SIPs | |||||
| Investment | No. of units purchased | “Amount of Investment(')” | Total Current Value of Investment (') | Gain/(Loss) (') | Annualised Returns (%) |
| Daily SIP : | (An unit bought on a trading day) | ||||
| NIFTY BeES ETF | 247 | 1,41,800 | 1,39,113 | -2687 | -0.04 |
| GOLD BeES ETF | 247 | 4,87,509 | 5,28,357 | 40848 | 0.17 |
| Monthly SIP : | (20 units bought at month end from June 30, 2010 to June 29, 2011) | ||||
| NIFTY BeES ETF | 240 | 1,37,543 | 1,35,171 | -2372 | -0.03 |
| GOLD BeES ETF | 240 | 4,71,554 | 5,13,384 | 41829 | 0.18 |
If one looks at returns from both a NIFTY BeES ETF SIP on a daily basis and 20 units purchased on a monthly basis, it is clear that an investment on a daily basis or at month end as an SIP has given better returns as compared to those from NIFTY.
Also, returns from gold outperformed that from NIFTY for all the periods mentioned above. In sum, an SIP in a gold ETF can not only boost your returns but also enable you to ride on the boom in alternate markets. It is also a good hedge against inflation. To invest in gold through SIPs one way is to purchase a gold ETF such as Gold BeES, Kotak Gold, etc, on the stock exchange through a broker. The alternative is to subscribe to the SIP of a gold fund. You may buy gold in demat mode as e-gold, too, through the National Spot Exchange. For this, you will be required to have a commodity demat account and an account with a commodity broker. Another method is to buy physical units but in such cases, the returns may be lower on account of transaction cost and taxes. SIP s in alternative markets is a good way to diversify risk and also benefit by way of price movements in both markets.
The author is a freelance writer