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SIPs - Investing systematically

| 5/9/2011 12:53 PM Monday

Over the last few years, systematic investing has emerged as the most favoured strategy among equity fund investors. The ever increasing number of SIPs being enrolled into every month is a testimony to the growing popularity of this disciplined approach to investing. Investors’ fancy for this approach is the result of a combination of factors such as increased volatility in the market, the need to build a corpus to achieve long-term goals such as child’s education and marriage, buying a house and retirement through smaller contributions and unpleasant experiences of investing at the peak levels in the past.

Moreover, this systematic approach allows conservative investors to increase their returns even while redefining their risk levels in a carefully controlled manner. Though a lot has been written about systematic investment, it is often perceived as an option only for small investors.

The fact of the matter is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows investors to invest in the stock market at different levels without having to worry about the market levels and the market movements in the short term. Remember, when you opt for regular investing, you abandon any strategy that might control timing of your investments. In other words, you continue to invest irrespective of market conditions. This strategy works very well partly because of ‘averaging’ and partly because, in the long run, markets move upwards in spite of short-term falls. As is evident, a systematic investment plan (SIP) is the best way to build up capital over a period of time.

An investent made through SIP ensures that the average price islower than the average NAV. However, it requires discipline to continue irrespective of the state of the market. There are investors who get panicky whenever the market witnesses a fall and get tempted to discontinue the SIP. However, the fact is that an investor who invests through SIP benefits in a falling market as he gets more units for the same amount. Therefore, one needs to carry on and reap the benefits in the long run.This, however, is not to say that one should not invest a lump sum amount in equity funds. For a long-term investor, making a lump sum investment is not an issue. However, a lump sum investment should not be the end of the story. Instead, it should be taken as a part of the continuous process to build wealth over time and needs to be followed by regular investments as and when investible surplus is available.

Either way, the key to successful equity investing is to make investments on a regular basis. As we all know, equities require time commitment and, therefore, one must have the patience to wait out the turbulent times. Therefore, even if you invest through an SIP, it is absolutely necessary to adopt a long-term approach. Many investors invest through SIPs in equity or equity-oriented funds for a couple of years, which is not the right thing to do. Remember, when you invest through an SIP, say, for five years, your average holding period would be less than three years, which is not adequate for an asset class like equity. Therefore, the ideal period would be 10 years or more.

It is equally important to keep an eye on the performance of funds in which the money is being invested. Regular investing does not protect you from the poor performance of the funds. Many investors often wonder how they will be able to get the benefit of compounding if they keep changing the funds from time to time. No doubt, making regular changes can be a fruitless exercise and hence one has to select funds carefully.

At the same time, one should not hesitate in replacing a poorly performing fund with a fund with better prospects. Remember, long-term investing requires a commitment to equity as an asset class and not to the funds. Since the money remains invested in equities, even while making changes, one continues to get the benefit of compounding. In fact, keeping track of the performance would ensure better results.

 

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