DSIJ Mindshare

FINANCIAL GUIDANCE : SIP Investment Mechanism Best In Long Term

Instead of making investing in an equity fund through SIP, is there a way to buy only when markets fall, like the traders do, so that I can maximise my gains?

Mahesh Patel, Mumbai

Mahesh, I do get such requests from time to time and it always takes a fair bit of effort to illustrate how difficult it is! It is natural for investors to want to maximise their gains and how better than to buy only on lows? So here goes: Let us take the example of investing into an index fund over a long period so that there are enough ups and downs to take advantage of. Let us actually believe that you are able to identify the lowest point in the index every month and time your monthly investment on that day.

While our vision is 20:20 in hindsight enabling us to locate that day in the month when the index was at its lowest, think of the enormous foresight and ability to predict the actions of millions of investors and figure out the day when the market will end at its lowest! But for a moment we shall believe that you can and make the investment precisely on that day. If you were able to consistently call this 12 times a year over, say, the last dozen or so years, what would have been the result? Starting on January 1, 2002, if you had invested the same amount every month your return would have been 17 per cent per annum compounded. Good, right? The table below is the index charted from 2002.

Now let us try out another method – that of playing a larger waiting game and accumulating your monthly investment sum till the market falls and then make the investment. So if the waiting period for a fall was three months, you would make a lump sum investment of three months worth in a single shot. So in this case your superhuman instincts are enhanced manifold. But no harm in imagining, right? This is how the investment would have performed:

Your return would be 17.48 per cent compounded per annum, a whole half per cent more than the previous method! And hold your breath, if you had simply followed a passive SIP which meant that the investment happens on a pre-determined date every month which could not be more mechanical, your return would be 16.4 per cent compounded per annum! For all that effort, your incremental return is only 1 per cent. In the first instance one had to clearly identify the lowest day of every month and make the investment and in the second, one had to wait for the market fall and make the investment. To achieve this, all one had to do was identify the 24 out of 4,745 days to make the investment! Remember the idiom about searching for a needle in a haystack? And finding the needle over and over again?

Timing the market, which consists of millions of investors, is humanly impossible. Using complex algorithms, advisors can figure out to some extent tactical allocations based on valuations, but timing the market…no. In a market environment that is unpredictable by nature; long-term savers should use the passive SIP mechanism for best results.

DSIJ MINDSHARE

Mkt Commentary28-Mar, 2024

Multibaggers28-Mar, 2024

Interviews28-Mar, 2024

Multibaggers28-Mar, 2024

Multibaggers28-Mar, 2024

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR