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An SIP is for all seasons

An SIP is for all seasons

Investors put in money as markets move upwards, and once the downward trend begins, they take their money out and eventually stop investing altogether. This is exactly the opposite of what they should be doing.

Ashu Suyash

Markets don’t like uncertainty. Neither do investors, it seems. When the markets move either upwards or downwards, investors know exactly what they want to do; they invest as markets move upwards, and once the downward trend begins, they take their money out and eventually stop investing altogether. Or until the market starts to go up again. That’s how investor psychology works. This is exactly the opposite of how it should.

While we vacillate between putting our money to work now and waiting, our financial goals remain constant. By staying out of the market, we delay achieving these goals—we may have to postpone a vacation or buy a smaller car than we had planned. With long-term goals that cannot be compromised, say retirement savings or higher education for children, we worry about how to fund them.

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The SIPs offered by mutual funds are widely acknowledged as the best way for investors to discipline investments made towards achieving their financial goals. They have the benefit of rupee cost averaging and smoothen volatility over the investment period, while adding the power of compounding to the portfolio. By itself, the rupee cost averaging argument is compelling. As you dripfeed your investment, it acquires units at lower prices during market dips, which makes an SIP ideal for wealth creation.

Yet, over the past several months, investors have cancelled their SIPs or have not renewed them, tossing away all these benefits. It may appear hard to accept, but it is important to have the discipline to stick to a regular investing plan, whatever the direction of the market. The benefits will accrue eventually.

Consider this. In 2000, the Sensex fell by more than 56% during the technology-led meltdown, a situation not very different from 2008, when it was down 52%. Assume that on 1 January 1999, you started an SIP of Rs 4,000 in a fund that tracked the Sensex. In four years (by December 2002), you would have invested Rs 1,92,000. However, your valuation on 31 December 2002 would have been just Rs 1,73,943. You would have lost Rs 18,057.

But what if you had continued your SIP for another four years till December 2006? You would have invested Rs 3,84,000, which would have grown to Rs 11,61,149, a profit of Rs 7,77,149.

Of course, no one can accurately predict the future market returns, but empirical evidence shows that in the long term, equity as an asset class outperforms all others. If the volatility of returns from equities worries you, our analysis of 28 years of Sensex data—from January 1981 to January 2009— should be convincing. It shows that if you are invested in good-quality, well-diversified assets, then the longer you stay invested, the more stable are your returns. What investors don’t realise is that SIPs don’t have to be in equity mutual funds alone. In a volatile market, when the risk appetite is lower, an SIP in an asset allocation product enhances the benefits of regular investing by balancing the portfolio as well.

Ashu Suyash is MD and Country Head, India, Fidelity International

Published on: Jun 12, 2009, 5:38 PM IST
Posted by: AtMigration, Jun 12, 2009, 5:38 PM IST