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Systematic investment: The way out? - Views on News from Equitymaster
 
 
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  • Jan 12, 2006

    Systematic investment: The way out?

    The markets are at record highs. Foreign Institutional Investors (FIIs) continue to pump in record amounts of money into the Indian stock markets. In CY05, the FII investments totalled an all-time record US$ 10 bn+. In fact, even in the first week of January 2006, FIIs have already pumped in US$ 600 m. India-dedicated funds are being launched in countries as diverse as Japan and the UK. Therefore, it does not seem that the fund flows are going to end in a hurry.

    Thus, this is the driving force for the markets hitting and staying at such high levels. In such a scenario, what can investors do? One possible way to counter volatility in the markets is investing through a systematic investment plan (SIP). Though generally used in mutual funds, this concept can also be applied to individual stocks.

    What is an SIP?
    An SIP involves putting fixed sums of money at regular intervals into a particular mutual fund/stock. This concept is used extensively in mutual funds. There are a few advantages that this style of investing offers. It does away with the need for lump sum investing. An investor can build wealth over a period of time through investing relatively small amounts over that period. An SIP harnesses the power of compounding. As you invest fixed sums of money, even small amounts, each month, over a period of several years, the corpus builds up significantly. Provided you have invested in the right avenues, the compounding effect takes place and one's investments can grow to substantial amounts, with the right amount of patience.

    Investing in an SIP also does away with the need to time the market. It reduces the risk associated with market fluctuations. Probably the most important feature of investing in an SIP is the fact that it inculcates discipline in investing. The legendary investing guru, Warren Buffet, has often said, and rightly so, that the number one enemy of an investor is the investor himself/herself! This is because investors tend to get swept away by emotions and thus, more often than not, end up making hasty decisions. The need to discipline oneself cannot be underestimated.

    It can be said that investing through an SIP is a sort of passive investment strategy in the sense that one does not need to worry about the daily fluctuations of the market and, in fact, one can use them to one's advantage. However, we must mention here that his is not necessarily a guaranteed way of making profits. Any investor must look primarily at the fundamentals of the company before putting his or her hard-earned money into the company's stock, either through a lump sum or in a systematic manner. Fundamentally strong companies with impeccable, high-caliber management teams, difficult-to-replicate competitive advantages and strong growth prospects must be the primary candidates for investment.

     

     

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