The August-September 2017 Issue
SIP â€“ A strong case for, and a not-so-strong case against, this multi-dimensional tool for investors, big and small
Read the headline, the title of this write-up, once more and pause for a moment. Can a case, however feeble, be ever made out against Systematic Investment Plan, that time-tested device used by investors in their bid to acquire units of mutual funds in a regular, consistent manner? Well, letâ€™s find out a bit before we merely confirm what most investors would say â€“ â€śHeck, no, we canâ€™t.â€ť
Systematic investment plan â€“ and one is not trying to defend or denigrate any of it without reason â€“ is a simple way to increase allocations. You pick up a fund and decide on the amount you wish to invest every month or quarter. You start doing it straightaway. May be, you will manage to find a distributor in your neighbourhood too. Or, you may wish to go direct and approach the fund on your own. At any rate, whatever means you adopt, the sheer simplicity, convenience and usefulness of the method will impress you.
And, so, month after month, your SIP will help you pile up your units. Somewhere on the way, the market goes up substantially, and you (like any other alert investor) decide to cash out a little. Thus, some redemption happens, a neat sum of money gets credited into your bank account. And life goes on just as it did.
What you have read so far looks utterly simplistic. It will still remain so when the market falls. Like many prudent investors before you, you decide not to suspend the SIP. â€śSo what if the market has declined?â€ť, you ask yourself. â€śI will not stop; after all, my SIP will only get me more units this timeâ€ť. That will be your answer. And it will be true all the way.
Okay, hereâ€™s the deal
SIP is really among the most commendable innovations in the realm of mutual funds. It allows the average bloke to remain disciplined and methodical. It instills a sense of control and restraint â€“ both features become essential traits when the market gets wildly violent. It actually encourages good investment habits. SIP, as someone I knew well many years ago, takes you to the saverâ€™s paradise.
I am not heaping praises on the institution called SIP. Lots of people have done it already â€“ and not without reason. There is great merit in Rupee Cost Averaging (RCA), and the common investor has no real argument against it. The idea of RCA is a rather smart one, as it brings down costs over a period of time. And costs are a huge, huge concern for investors.
SIPs, and I urge you to pay attention at this point, are not the most perfect strategies when the market is about to boom. Well, read that last line one more time. When the market is set to move significantly on a upward, secular graph, would it not make sense to do a bulk investment? Or, should you consider that your starting line instead?
To me, the subject rests on a simple premise: A bulk allocation is better when the market has started rising â€“ and displays unmistakable signals of a bullish formation. The latter is set to happen and your large, one-time allocation will help you secure great returns.
Caveat â€“no one can predict perfectly
Of course, it is impossible to predict every time that a bullish trend is indeed about to emerge shortly. Which great investment guru can claim to be correct about this at every juncture? The market, on an average, grants a limited number of opportunities to each one of us. The ordinary investor will not â€“ letâ€™s stick to the best-case scenario here â€“ be able to do it on more than, say, three occasions in his life. The best fund managers can also get stumped at times.
A single allocation at the right moment in history can achieve more-than-just great returns. It will leave the investor concerned triumphant and jubilant â€“ perhaps a bit more than his cousin who managed to do only the SIP at the same time.
Therefore, hereâ€™s the bottom-line â€“ a one-time investment can be championed only at the most appropriate juncture. The patient investor will wait for this to come his way. There is no assurance whatsoever that his single allocation actually will be the proverbial hare, while the SIP aficionado will remain the tortoise. And we all know who actually won the race.
So, what is your strategy, brother?
For the record, let me advocate a mix of both tactics. In other words, do your SIPs but wait for the single investment opportunities too. No unilateral case against systematic investment really exists. Make it your personal investment mantra, a way of life in a manner of speaking. Yet, and yet, do not hesitate to prematurely redeem that fixed deposit to quickly but surely enter the market with a weighty allocation.
The race for performance is run every day, every season and in every market condition. At the end of it, may be after an investment career spanning 25 years, you will emerge as a real champion. Till the end of the journey, exercise your choices carefully.
A combination of the two strategies will fetch you higher yields. Do not think in terms of SIPs alone or exclusively stand-alone allocations. Do both in keeping with your risk profile. Consult a professional financial advisor, as always, in case you require specific support on any front.
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Disclaimer: All information provided in this newsletter is obtained independently from sources that are considered reliable and authentic. Wishlist Capital, its associates, stakeholders and partners, will not be liable in any way for inaccuracies or errors that may have been included inadvertently. Investment decisions, taken now or later on the basis of this newsletter, are entirely your own.