With the stock market going nowhere in the last few years, retail investors have been in a fix. On one hand, debt instruments have been giving reasonable returns at 6-9 per cent but they are not enough to offset the inflation.
Equities or variants of equity funds have given average returns of 10-12 per cent. Only gold has been an outperformer by leaps and bounds. So, for a retail investor, there is little one can do in terms of allocation unless he/she aggressively puts money in gold and live with the fluctuations.
In such times, any retail investor needs to lie low and stay invested. Here are some numbers that should give investors through systematic investment plans some comfort. As seen from Table One, stock markets have been volatile for last more than two- and- half years now. That is, the value of S&P CNX Nifty is more or less at the same value today as it was in April 2010.
| SIP INVESTMENT V/S LUMP SUM |
end
Value
(Rs)
Bought
(Rs)
Bought
This means the returns have been negligible even in times of high inflation. As a result, many investors are now desisting from investing in the markets. Let’s look at this approach and if it is correct? Also, are there only two option –to invest or not to invest – or, there is alternative method too.
The sayings goes one should not put all eggs in one basket. The same applies to investments too. This implies that you should have a diversified portfolio. The diversification can be done by choosing different investment avenues as well as at by investing at different point of times. When there is a systematic method of investing at specified time interval it is known as ‘Systematic Investment Plan(SIP).
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A systematic investment plan is not much different than the savings option of a recurring deposit account with a bank, except that these amounts are invested in a mutual fund. The SIP option is available with all types of funds like equity, income or gilt and works in your favour as the NAV is averaged out as opposed to a one-time buy. As you will be investing at regular intervals, the NAV may be higher or lower depending on market fluctuations. This helps in averaging out your cost of investment.
SIP method can be used for buying into equity stocks as well as ETFs too which are traded in the stock market. So how does SIP help in this regard? Since the amount invested each month is fixed, what changes is the NAV. So, when the stock prices are down, the NAV dips, which mean that you get allotted more units of the fund. Similarly, when prices rise, you get allotted more units, plus the return on your earlier units, acquired at lost cost rise. This does away with the risky business of timing the market and ensures that you invest in a disciplined manner.
- Some points why you should go for SIP
- Enables to reduce the risk of investing
- Does not commit all your cash at one point of time
- Brings discipline in your financial planning
- Provides opportunity to buy more at lower price
- It not only inculcates financial discipline among investors, it helps the investor to negate the effects of the market cycles. As can be seen from the table, there are two investors one who buys by way of SIP into Nifty Units at the beginning of the quarter and the other who buys upfront in the market in April 2011.
The total units bought by the second investor B is only 20.569 whereas the same by Investor A is 22.906 as he is able to buy more at lower price. In this case, investor A who buys into by way of SIP is gaining.
SIP gives good returns when the market is volatile. It may not provide superior returns either when the market is bullish or in a bearish phase. Since it is very difficult for investors to time the market it is advisable that they go for SIP investment.
SIP provides opportunity for investors to terminate the plan before the time period stipulated in case he or she is not satisfied with the performance of the investment.
SIP is a very good strategy to invest for those who have a long term approach to investing. It is also recommended for investors who do not have the time to track their investments at frequent interval. SIP can be used to buy not only into mutual funds but the same can be for individual stocks, GOLD, ETF etc.The underlying principal is that you buy less at higher price and buy more at lower price.
Instead of a wait and watch approach or an approach of avoiding investing totally, it is advisable to go for SIP way of investing as it will benefit us especially in the longer run. If there are no immediate cash requirements, investors should look at continuing the SIPs as long as they can. This is important as they get the benefit of being for a longer time in the market while also availing of the benefits of compounding.
The writer is a freelancer