SIPs - A Step In The Right Direction

A while back my ex-colleague thanked me for my insistence as because of it he had amassed a large amount through his Systematic Investment Plans (SIPs), which in normal course would not have been possible. I was very happy as he continued his SIPs, irrespective of market conditions for the last 10 years. That was his secret to building a good portfolio via SIPs and needless to say he is getting a good return today when most of the investors are stopping their SIPs in despair.

There are few points that require clarification before starting an SIP or throwing in the towel in their existing SIPs.

SIPs are not an investment in itself but a route to investment.

SIPs are long term and benefits due to the vagaries of the market.

For the salaried class this is a good way to build up a corpus. For the investors who have a corpus already they should opt for the STP route.

When the markets are down that is the best time for SIPs, unfortunately most of us stop or withdraw our SIPs in this scenario.

I would like to explain the above points for a better understanding of SIPs. I will go point wise.

1. SIPs are an investment route into the fund of your choice, capturing the markets at all points through their ups and downs by investing the money in installments. This is called “Rupee cost averaging” and fetches an average return of the market for the SIP period. Our funds buy higher number of units when the market are cheap (read down) and less number of units when they are expensive (read up) thus giving you an average of the markets.
2. SIPs cannot be for short-term goals and definitely not for the fickle hearted. The tenure of a SIP is minimum for a period of four to five years because that is the average period of the Indian market cycle. The longer the duration the better. I would recommend my young salaried investors who have just started working to start a SIP to build a retirement corpus through the SIP route.
3. There are three ways to invest in Mutual Funds and they are SIPs, STPs and Lump sum, suiting all types of investors. SIPs are meant for those investors who do not have a corpus presently but would like to build one.

Systematic Transfer Plans (STP) is typically meant for those who have a corpus and would like to put that money into investments in tranches rather than all at once. The corpus is invested into a liquid or an Ultra Short-Term Fund and at intervals they are invested into your chosen fund thereby behaving as an SIP and also earning liquid fund returns on the remaining corpus in the interim period. Lump sum investments into mutual funds are dependent on the time and the performance of the markets.

Ultimately one of the most important factors, which I would like to emphasise is that, the whole concept of SIPs is built around the fact “Buy Cheap and Sell High” and it is prudent to have a long term continuity plan for your SIPs.

For example, in the last one year, most of the SIPs have been giving negative returns and for the last five years they have given around five to six per cent per annum while for the last 10 years they have given a return of 11-12 per cent per annum, which proves that the longer the tenure the better are the returns.

I will sum it all up by saying that just like you do not abandon your vehicle if the fuel finishes on the road likewise please do not discontinue your SIPs if they are not giving you good returns presently.

In the long run the magic of compounding will work when your SIP or STP will achieve critical mass and then you will be pleasantly surprised.

Happy Investing!

The author is a wealth advisor and Founder,  Tangerine Ideas