ATM :: SIP mode best suited for investors struggling with tight budgets, EMIs

Priyadarshini Dembla | Dec 10, 2013, 05.54AM IST | Times of India


The importance of saving and investing cannot be overstated. And, it is never too early to start investing. Rather, it is a case of sooner the better. However, with rising costs and tight budgets, the question is how one should go about with investments? In addition, there is the market scenario to consider. For instance, if the equity markets have recently scaled new highs or have corrected sharply, the dilemma is would it make sense to invest or should one hold off for a while?

This is where the systematic investment plan (SIP) method of investing in mutual funds comes into the picture. SIP is a simple and proven investment strategy which can help investors in accumulating wealth in a disciplined manner over a longer time frame. In an SIP, instead of investing a lump sum, a fixed amount (which can be as small as Rs 100) is invested at regular intervals in mutual funds. Some of the key benefits of SIP investing are listed below.

No need to time the market:  At no point of time, should the current market level deter a long-term investor from making a beginning. One cannot always be the best buyer or the best seller. Timing the market is a time-consuming and a highly risky strategy for investors. Not many investors can claim to have the ability to consistently time the markets accurately. This is the reason why several investors end up losing out on market opportunities in pursuit of trying to time the market in vain.

Rather, investors should focus on meeting their investment objectives and deciding where they should invest. With an SIP, one does not have to worry about what the market levels are. All one needs to do is to identify the right funds and get invested. In the process, investors do not have to delay their investments either.

A convenient investment mode: The SIP mode of investing is more convenient than making lump sum investments. Typically, an SIP entails investing a smaller sum every month vis-a-vis larger amounts in lump sum investments. This, in turn, makes the SIP mode apt for investors who are struggling with tight budgets and EMIs. Often, lack of adequate funds is an excuse for delaying investments. An SIP enforces discipline in investments by ensuring that a fixed sum is invested every month, and is convenient on account of the small ticket size.

Using rupee-cost averaging:  The benefits of investing via an SIP become apparent in times of market volatility. When the net asset value (NAV) of the mutual fund unit drops during a downturn, each SIP installment invested results in more units being credited to the investor. This, in turn, results in averaging out the cost of purchase. In effect, in times of volatility, investing via the SIP route becomes more lucrative. This is further explained through the table given here.

A disciplined approach to creating wealth
2013 SIP Amt (Rs.) NAV (Rs.) N o. Of Units
Jan 1 1000 10 100
Feb 1 1000 12 83.3
Mar 1 1000 14 71.4
Apr 1 1000 16 62.5
May 1 1000 18 55.6
Jun 1 1000 20 50
Jul 1 1000 22 45.5
Aug 1 1000 24 41.7
Sep 1 1000 20 50
Oct 1 1000 22 45.5
Total 10000 17.8 605.5
Note: Avg Cost = Total cash outflow/Total no of units, i.e. Rs.10000/605.5=Rs.16.5. Whereas, Avg Price=Sum of all NAVs at which you have invested/Number of months of your investment, i.e. Rs.178/10=Rs.17.8. Therefore the Avg Cost is Lower that the Avg Price.

It is also noteworthy that SIP helps an investor avoid a knee jerk reaction of selling his/her investments during a bear market, thereby helping him/her realize the full value of his investments.

(The writer is research associate, Morningstar India)


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