It is always difficult for retail investors to decide when to invest in and pull out of the stock markets. It becomes all the more difficult to do a long-term financial planning if markets are volatile and investors are not confident to invest in equities directly.
During such a phase, a retail investor can look at systematic investment plan (SIP) of mutual funds. As the name suggests, it is a method of investing a fixed sum regularly in a mutual fund and is like saving in a recurring deposit. It makes more sense to invest in a SIP when markets dip as one is not buying units at peak but small amounts continuously which will average out over a period of time. So, over a longer period of time upwards of five years your chances of making profit are much higher when compared to an one-time investment.
One of the key advantages of SIP is rupee cost averaging. It means that when markets go down, the fixed SIP installments buy more units and vice-versa. Since SIP installments are made at different points of time and at different net asset values, the purchase price of units average out over the investment period. (See graphic)
The popularity of SIPs in India can be gauged from a recent report by Boston Consultancy Group and CAMS which says that from 7 lakh live SIPs in 2003, the number has risen up to 22.5 lakh till date. In fact, in the first quarter of 2010, SIP subscriptions accounted for 19% of total inflows into equity mutual funds, compared with just 2% in 2005.
The report also underlined that average tenure of equity money staying invested in one scheme is about 30 months and nearly 50% of the asset under management (AUM) has an investment tenure greater than two years. Nearly 70% of equity money has investment tenure exceeding 12 months.
One needs to be a disciplined investor to pay the SIP installment every month. However, if you miss paying any installment you can pay the amount the following month and continue with the benefits. Like most other investments, SIPs too come with a three-year lock-in-period.
One does not need to accumulate a lump sum to begin investing in SIP. However, if one invests Rs 10,000 per month in an equity fund and has a surplus of Rs 100,000 with a long view, the amount can just be pushed into the SIP account. Remember, SIP is just a payment mode and not a scheme. A SIP enables an investor to take advantage of the growth potential of mutual funds even if he/she does not have a large sum to invest. Most mutual funds require only Rs 500 per month to start a SIP. An investor can opt to pay the amount every month via electronic clearance service from his/her bank. The mutual fund will debit the amount from the account every month. An investor should monitor the scheme every 3-6 months and check what returns the fund has given.
Though SIP is a disciplined way to invest and any time is a good time to start, experts say an investor should avoid investing in too many funds. If one does so, there are chances of investing in similar type of funds and returns getting fragmented. To start with, it is always advisable to choose four to five funds and divide the investable surplus equally. For example, if one has Rs 5,000 to invest in SIPs every month, he/she should go for two funds which has given good returns over a period of five years. Similarly, if one has Rs 10,000, he/she should pick up four or five funds. By doing this, funds can be tracked closely, returns can be maximised and risks associated with every market-linked investment products can be spread out.
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