Share Market

Systematic Investment Plan (SIP) is a way of investing specifically designed for those who are interested in building wealth over a long-term. It is useful for those who want to get their investments going, but don’t have a large sum of money to invest at one particular point of time. The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern.

In developing economies like India, where securities markets (equities and fixed income instruments) can be volatile and it is rarely possible to time the markets and predict the future. We can seldom accurately predict when a particular stock will move up or where the interest rates are headed. Systematic Investment Plan makes the volatility of the securities markets work in your favor. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always be less than the average sale price per unit, irrespective of the market rising, falling, or fluctuating. This concept is called Rupee Cost Averaging (RCA). With a sensible and long-term investment approach, rupee cost averaging can smooth out the market’s ups and downs and reduce the risks of investing in volatile markets.

So, how does one decide when is a good time to start investing in a SIP? The answer is simple. Anytime is good if one can maintain the discipline of making regular monthly investments.

Let’s look at an example where an investor started at possibly the worst time in the recent history of our markets – February 2000 – at the peak of the dot-com bull market. He started investing Rs. 1000 every month in a composite fund and continued investing till Sep 2008.With the hindsight knowledge of the huge fall from the dot-com/technology driven high of year 2000, it’s a good bet that nobody would have advised the investor to start a SIP at that time. But he still had annualized returns of 29% compounding even after starting just before the market crashed! 2001 to 2003 was a sticky bear market. But that meant that the investor was actually buying units of the mutual fund at very low prices. His patience and discipline got rewarded when the market finally took off in 2003.