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Markets are volatile, but SIPs can be of help - Outside View by PersonalFN
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Markets are volatile, but SIPs can be of help
Dec 19, 2011

The capital markets are the tantalizing pulse of any economy, as the capital market indices to an extent reveal the confidence of investors (both domestic as well as foreign) in the economy. But the present volatility of the Indian equity markets steered mainly by debt-overhang situation in the Euro zone and sovereign rating downgrade have dented the confidence of many of you investors and may have even sent shivers down the spine.

Since the last peak of the Indian equity markets (attained on November 5, 2010, where the BSE-Sensex was at 21,004.96), we are still down by good -24.5%, and on year-to-date (YTD) basis by about -22.9%; with of course a series of intermediate impulse and correction. And putting a traders hat, some of you may have also indulged in immense trading, thus trying to time series of peaks and troughs in this market-and may have even found it to be thrilling experience. But let us apprise you that a trader is good only until his last trade. You don't know what the future has in store for you - good, bad or ugly?

Remember the thrill of timing the market, can give you a kick, but the kick can kick you out.

We believe that while the markets have turned turbulent at present in the last one year, it is important to stay invested and of course do more value picking.

Data as on November 24, 2011
(Source: ACE MF, PersonalFN Research and inputs from the book: "The Scam")

The chart above reveals that over more than two decades the Indian equity markets have witnessed a series of both - positive as well as negative economic and political events. But a noteworthy point is that only those who have shown their perseverance to stay invested for the long-term have gained despite such impulse and corrective phases steered by both positive as well as negative economic events occurring across the globe. If were to invest a sum of Rs 100 on November 26, 1991 (when the Sensex was at 1,855.94), the same today would have yielded a sum of Rs 854 as on November 24, 2011, thus clocking a whooping return of 754.5% on an absolute basis. On the other hand all those who have participated in exuberant phases of the equity markets or acted on the wrong advice of investment consultant or even engaged in trading have either lost wealth or clocked petite returns.

Hence, we believe that it is imperative for both new as well as existing investors to refrain from making blunders of timing the markets, or get carried away by the exuberance created by the market. The Systematic Investment Plan (SIP) route offered by mutual funds can help you tide the volatility of the equity markets well (by investing systematically); but a long-term investment horizon is indeed needed.

What is SIP?

To simply put, SIP is a mode of investing in mutual funds which enables you to invest systematically and in a regular manner. The method of investing is similar to your investment in a recurring deposit with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk.

A SIP enforces a disciplined approach towards investing, and infuses regular saving habits which we all probably learnt during our childhood days when we used to maintain a piggy bank. Yes, those good old days where our parents provided us with some pocket money, which after expenditure we deposited in our piggy banks and at the end of particular tenure we saw that every penny saved became a large amount.

SIPs too work on the simple principle of investing regularly which enable you to build wealth over the long-term. In case of SIPs, on a specified date which can be on a daily basis, monthly basis, or on a quarterly basis, a fixed amount as desired by you, is debited from your bank account (either through a ECS mandate or through post-dated cheques forwarded) and invested in the scheme as selected by you for a specified tenure (months, years). So, you have fewer hassles while investing as well as tracking your investment dates.

It is noteworthy that SIPs imbibe in them the following benefits, which can help keep your financial worries at bay and can germinate regular investing habit in you, thus aiding to grow you wealth in the long-term.
  • Makes market timing irrelevant:

    If you are the one who shudders with the wild swings of the Indian equity markets - like at present but have a vision for long-term investing, then SIPs can be of great help to you.

    Timing the markets can be disastrous to your objective of wealth creation as a trader is only good until his last trade. Very often many of you do burn your fingers in the equity markets and conclude that equity are either not your cup of tea or cannot create wealth for you. However, several studies have repeatedly highlighted the ability of equities to outperform other asset classes (debt, gold, even real estate) over the long-term (at least 5 years) as also to effectively counter inflation.

    So, now one may ask if equities are such a great thing, why are so many investors complaining. Well it's because they either didn't have the wherewithal for investing in stocks or mutual funds, or they wore a traders' hat. We believe all these problems can be solved through a SIP in a mutual fund with a steady track record, as the SIP route enables you to even-out the volatility of the equity markets effectively.

  • Rupee cost averaging:

    To absorb the shocks of the volatile equity markets well, SIP works better as opposed to one-time investing. This is because of rupee-cost averaging.

    Provides cushion against market volatility
    (Source: ACE MF, PersonalFNResearch)

    Under rupee-cost averaging, you typically buy more mutual fund units when prices are low, and similarly buy fewer mutual units when prices are high. This infuses good discipline since it forces you to commit cash at market lows, when other investors around you are wary and exiting the market. It also enables you to lower the average cost of your investments.

  • Light on the wallet Instead of feeling the pinch of investing a lump sum amount at one go, SIPs enable you to invest smaller amounts at regular intervals (daily, monthly or quarterly) thereby attempting to infuse a regular saving habit in you (as mentioned earlier). So, say if you cannot invest Rs 5,000 in one shot, that's not a huge stumbling block; as you can simply take the SIP route and trigger the mutual fund investment with as low as Rs 100 per month. And if you are the one who still enjoy the daily rollercoaster rides of the Indian equity markets, but want to manage the daily volatility, then you can start a daily SIP as well.

  • Power of compounding

    As SIPs subscribe you to the habit of investing regularly, it enables you to compound your money invested. So, say you start a SIP of Rs 1,000, in a mutual fund scheme following prudent investment system and processes, with a SIP tenure of 20 years and expect a modest return of 15% p.a., your money would grow to approximately Rs 15 lakh
Your every bit of savings makes you rich
(Source: ACE MF, PersonalFN Research)

In a nutshell...

All of us invest in the equity markets with an objective of wealth creation, but if a systematic step is taken by adopting the SIP mode offered by mutual funds; it will not only infuse regular saving habit but also help you make your financial dreams come true - be buying a dream house, buying a car, providing good education to children, getting them married well, or even retiring. While you may try to create wealth over the long-term by investing in equities, timing the equity markets can land you on the wrong foot and erode wealth. Adopting the SIP route and subscribing to good habit of saving and investing regularly, as we learnt in our good childhood days where we use to maintain a piggy bank, will work wonders to make our dreams come true.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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