Forever systematic

FUND TREND

Systematic Investment Plans of mutual funds may not work well when the market moves in one direction but in the long term they are the best.

When the market is on an upward march everybody is tempted to invest and when it starts moving in the opposite direction investors panic and sell. As a result they end up buying high and selling low whereas the ideal way to make money is to buy low and sell high.

But experience tells us that it is difficult to time the market. Nobody can guess which way the market will move and hence most of them end up entering and exiting at wrong times.

The best way to avoid this problem is to invest in a Systematic Investment Plan (SIP). "An SIP is a disciplined investing tool and tackles the issue of timing the market. With SIPs you don't have to worry about the level of the market," says Tridib Pathak, CIO, DBS Chola Mutual Fund. Investors do not have to take a call on when to enter the market because they are invested at all times.

Despite its beauty, SIP investors have not been a very happy lot over the past three years. Most investors feel they have invested for too long yet their investments have not kept pace with the markets. Before we address the dilemma facing SIP investors, here is how it works.

SIP is a vehicle offered by mutual funds to help you save regularly wherein you have to invest a fixed sum either monthly or quarterly. When you invest in a mutual fund, you usually buy the units at the prevailing NAV (net asset value) by making a lump sum payment.

The NAV is determined by the market price of the stocks the fund has invested in. If the market starts falling, the NAV will also start falling and the investor will be at a loss.

In case of SIPs as you invest a fixed sum regularly, you can get the benefit of buying the units at different NAVs. When the NAV is high, you will get fewer units and when it drops, you will get more units. This is in line with our natural desire to buy low and sell high.

Also, as you are buying at different NAVs, your average cost reduces. An SIP actually reduces the risk of committing a lump sum amount, as it spreads the investments over a longer period, at various levels of the market.

Therefore, says J Rajagopalan, managing director, Bluechip Corporate Investment Centre, "For first-time investors, SIP is the best route to enter the market as it allows them to invest a small amount regularly instead of blocking a large sum."

Beating the Street

SIPs are more beneficial when markets are volatile. Due to the uncertain direction of the market, investing a lump sum can be risky. During these phases, the regular investment strategy of SIPs is useful.

Commenting on the current volatility of the markets, Rajagopalan says, "SIPs are suitable for current market conditions. Understanding this, many investors have shifted to SIPs this year. The quantum of SIP investments has increased by more than 100 per cent as compared to last year."

SIPs are especially suitable for those who want to participate in the market but do not have a large sum to invest. The minimum amount to be invested monthly/quarterly in case of SIPs can be as little as Rs 500.

"Another benefit is that once you start with an SIP you have to invest regularly. So, this makes you a disciplined investor and ensures that you do not spend when you need to save. In addition, as you invest regularly, it helps you meet your long-term financial goals like funding your retirement, higher education etc," says Sameer Kamdar, national head "� mutual funds, Mata Securities.

Investing through SIPs is also convenient as you do not have to take time out of your busy schedule to make your investment decisions. Also, adds Kamdar, "Anybody who doesn't have direct access to the market and who does not have the time and expertise to invest in the market directly can take the SIP route."

What if?

But all this is just one side of the coin. On the other side, SIPs have some limitations too. "The disadvantage of SIPs is that they do not work in a one way market that is either moving upwards or downwards," says Rajagopalan. SIPs do not protect you from making a loss in a continuously falling market.

Also, if the market keeps moving northwards and if you keep buying every month then you will end up buying at higher price every month.

"If the investment time horizon is short and during that period if the market keeps moving in one direction, then the investor loses," says Pathak. But adds Kamdar, "Even in a secular bull run there are many falls. So, we cannot say the market is moving in one direction."

A comparison of three-year returns of SIPs with the respective point-to-point fund returns show that almost all investments through SIPs, except DSP ML Equity Fund, have delivered less returns than what you would have earned through a one-time investment.
 

TOP 10 SIPs
Scheme Name	5 Year  SIP Returns	5 Year P-P Returns
DSP ML Equity	58.82	32.50
Reliance Growth	48.04	58.90
Reliance Vision	44.54	58.40
Franklin India Prima	42.69	57.40
HDFC Equtiy	40.48	47.20
DSP MLOpportunities	40.48	44.80
HDFC Top 200	40.23	45.07
Birla Sunlife Equity	39.31	41.07
Pru ICICI Power	38.53	42.50
Tata Pure Equity	38.27	37.30
Scheme Name	3 Year  SIP Returns	3 Year  P-P Returns
DSP ML Equity	46.61	42.20
SBI Magnum Multiplier	39.29	58.60
Reliance Growth	38.17	61.80
HDFC Equity	34.82	51.60
Birla Sunlife Equity	34.68	55.20
SBI Magnum Contra	34.49	42.90
HDFC Top 200	34.00	51.40
DSPML Opportunities	33.89	52.90
Kotak - 30	33.63	50.80
Reliance Vision Fund	33.62	52.70

So, does this mean that it is better to invest a lump sum amount in a mutual fund scheme and forget about it rather than investing through an SIP? Pathak is of the view that if the investment horizon is short then SIPs will not be beneficial.

He says, "In order to benefit from SIPs the time horizon has to be as long as possible. One should stay invested for at least five years."

Again, a comparison of five-year returns of top ten and bottom ten SIPs with the respective point-to-point fund returns for the same period reveals that some of the SIPs have delivered better returns than one-time investments.

In case of funds where SIP returns are lower than point-to-point returns, the difference is not so vast. This shows that the longer you stay invested the more you benefit from an SIP. 
 

BOTTOM 10 SIPs
Scheme Name	5 Year  SIP Returns	5 Year  P-P Returns
Pru ICICI Growth	33.26	32.9
Principal Growth	33.18	36.07
Birla Advantage	32.58	34.20
Birla India Opportunities	29.83	39.90
Birla MNC	29.08	31.30
SBI Magnum Contra	28.49	39.11
ING Vysya Select Stocks	28.07	26.60
Principal Equity	27.85	29.80
SBI Magnum Equity	27.78	28.90
DBS Chola Opportunities	18.27	17.40
Scheme Name	3 Year  SIP Returns	3 Year  P-P Returns
Birla Advantage	28.21	44.09
Principal Growth	27.43	44.20
Principal Resurgent	25.72	42.30
Cholamandalam Growth	25.69	42.50
Birla MNC	24.77	38.70
Birla India Opportunities	23.90	39.60
Principal Equity	23.89	33.60
ING Vysya Equity	20.99	34.50
Birla Dividend Yield Plus	18.18	35.30
Chola Opportunities	16.62	28.70

Kamdar says that equities over the past decade have delivered excellent returns and with the Indian economy expanding it will continue to deliver good returns. His advice to investors: participate in the markets through the SIP route and benefit from the growing equity markets.