All mutual funds, touts, financial planners, advisors etc. advocate a veneer method of investing in equity through ‘Systematic Investment Plan’ (SIP), where investors are encouraged to invest a fixed sum at regular frequency, usually every month as the best way to create long-term wealth. The key purpose of SIP is to maintain the strategy of rupee cost-averaging where more units would buy, when prices are low and fewer units would buy when prices are high so that the cost per unit, over time would eventually average out. It is just a convenient tool for those investors who do not have a big-lump-sum at the start, where they could invest small amount regularly. Though the SIP investing mitigates the risk in volatility of stock market, but it may be proved a very dangerous tool, if we rely on alone SIP blindly. It may lead your investment would have either get marginal gains or may be ended up even losses. While going through study, we found that SIP work well in bearish phase where all purchases are made at that time and the market eventually turns up. In order to get sufficient reasonable return, every new purchase should be made at a lower cost than previous one, over the period so that your average price would be lower than that of initial purchase price. It is thus just misconception SIP can generate higher return; it is all depends on which market condition you are in and when you are invested through SIP or lump-sum investment or both.

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Using lump-sum investment through SIP

SIP stimulates investors save regularly and takes away the emotion and uncertainty of investing under volatile market conditions and the temptation to time the market. But if you have a blind faith about SIPs, you will be sorely disappointed. Investing systematically may have its own limitations but it is still the best way to invest in an equity mutual fund. We should not look at SIP in isolation; we have to look investing through SIP as well as lump-sum amount whenever we have. The key is that even with lump sum investments, you can be regular. Keep aside a portion of your income every time you get a large inflow of money. For instance, when you get a bonus from work, it can be invested in a lump sum as an additional investment. If you are made lump-sum investments while ongoing SIP, you would be able to generate better return and create sizable corpus in middle-term even in volatile turmoil conditions. It is evident that lump-sum did perform better in periods from November 2003 to November 2008 when SIP was started just before a market peak. This five-year period provided had no opportunity for an investor to buy lower than the previous purchase price, except towards the end after the market crashed. Despite the crash, a lump-sum investment would have given a CAGR of 12.50% whereas a SIP in this period would have left an internal rate of return (IRR) of just 0.48%. However, it is unlikely that we may see such a period again for a long time.

Choose Flexi amount in SIP

You must start saving for a long-term goal, such as your retirement, for which you would have to set aside a small amount from your income each month. Investing in equities is the key for long-term wealth generation. But setting up a normal SIP is not enough. For instance, your income is not going to remain static over the coming years; it is going to grow. So, your SIP investments should not be of a fixed amount. It should also grow aligned with your increasing income so that you could easily achieve goal without any interruption. You might know that you cannot alter the fixed amount while ongoing conventional SIP investment where you have already registered with an ECS mandate to your bank, you would have to stop the ongoing SIP and revise the mandate to change the investment amount at every time when you intend to increase or decrease the SIP installment. The solution is offered at PrudentFP through online platform, which allows you to modify the SIP installment amount every time, within the minimum sum required for that scheme and the maximum specified by you. This option is beneficial for those who do not know how much money they can contribute every month towards the SIP. Since savings can fluctuate, sometimes it becomes difficult to make the periodic payments. With flexi-SIP, you can invest as per your liquidity. So, instead of putting in a fixed amount, say, Rs 1,000 in the scheme every month, you can choose to invest Rs 5,000 in a particular month and only Rs 2,000 the next, depending on how you perceive the market situation.

Conclusion

It is undoubtedly SIP makes investors save regularly, gets self-discipline and creates wealth over the long-term. But having a blind faith about SIPs, often does not improve expected returns. The best action should be to avoid trying to time the market as it never remains top in and bottom-out. Hence, there is no guarantee for market-linked products. You could lose money in equity shares, equity schemes and even in bonds. Remember, SIP is a risk management tool with a limited function. The function is to prevent you from investing lump-sum at market peaks and encouraging you to spread out the risk over time. Hence, the value of your SIP like your lump-sum investment would depend when you start and end with respect to the market. You cannot predict where the market will go in three, seven or 10 years from now, but you can set the favorable time to start your SIP along with lump-sum investment. Create opportunity to start your investment when the market valuation is low or at least not high while keeping watch when the market takes deep breath either in bearish or bullish phase. Your more contribution can save extra returns and create respectable corpus irrespective of the market valuation.

This article got published in Hindi Dainik Bhaskar on 08-09-2015, See link here

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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