USE THE SYSTEMATIC INVESTMENT PLAN (SIP) WISELY
To get higher returns, invest regularly through SIP, follow the markets and top up during falling markets
Markets are like mood swings. There are ups and downs like it happens in mood swings and this is the market volatility. A very prudent investment technique called the SIP is used to beat this volatility and achieve rupee cost averaging. This means that the investor buys units by investing a fixed amount of money on a weekly or monthly basis in the mutual fund. Alternatively, he buys fixed number of units on a weekly or monthly basis, wherein the amount invested varies. By so doing he achieves rupee cost averaging. In the former scenario, the NAV is going down when the markets are falling and he is allotted more units, and when it goes up the NAV also rises and he is allotted lesser units. Accordingly, in the latter scenario of purchasing fixed number of units, the investment cost goes down in the falling markets and it rises in when the markets starts going up.
Let us explain this with the help of our exemplified research. We have considered an equity diversified fund with a 10 year plus time horizon to cater for the rise and ebb of the market cycle (please refer to the NAV chart below). The falling market cycles are evident from Feb 08 to Jul 09, Aug 11 to Sep 12, Mar 13 to Oct 13 and Feb 16 to Jun 16.
Read the Markets to Invest Wisely: We have considered only the first scenario of monthly SIP with a fixed investment cost of Rs. 10,000/-. The first SIP instalment was executed on 02 Jan 07 at an NAV of Rs. 110.80 and the investor was allotted 90.204 units (10000/110.80). Next month in Feb 07 when the investor again invested Rs. 10,000/- he was only allotted 88.285 units because the market had risen and the NAV had gone up to Rs. 113.270. If you refer to the Unit Allotment Table, it will be evident that the unit allotment is more when the markets are falling and less when they are rising, thereby averaging out the rupee cost. An investor must understand this trend and take advantage of the falling markets. A doubt may arise in the investor’s mind as to what are the indicators that the markets are falling. Besides SENSEX and NIFTY, there are lot of technical parameters but our idea is not confuse with the technicalities. Therefore, to keep it simple we recommend that an investor must see his portfolio on a monthly basis and calculate the percentage difference between the market value and cost value of his investments. In rising markets this percentage difference will go up and in falling markets it will go down, sometimes to even negative. To prove our point, we worked on three cases as below. To bring the calculations up-to-date with the latest NAV we have considered investments from 02 Jan 07 to 02 May 18 and market value of these investments as on 25 May 18.
Regular SIP: In this case, a regular monthly SIP of Rs. 10,000/- was made. The investment cost is Rs. 13.70 Lakh with 6801. 283 units allotted. The fund value as on 25 May 18 at existing NAV of Rs. 441.631 was Rs. 30.04 Lakh.
Regular SIP with Stoppage in Falling Markets: In this particular case the investor stops even his regular SIP due to fear psychosis during the falling markets phase. Ipso facto, his investment cost reduces by Rs. 4.50 Lakh to become Rs. 9.20 Lakh and he was thus allotted only 3977.283 units. The fund value of these units on 25 May 18 at the existing NAV of Rs. 441.631 was Rs. 17.56 Lakh.
Regular SIP with Top Ups in Falling Markets: In this case, in addition to the regular SIP of Rs. 10,000/- per month, the investor topped up with Rs. 10,000/- a month during the period of falling markets. He thus made 45 additional top ups and his investment cost is Rs. 18.20 Lakh. Accordingly, he was allotted 9625.283 units whose fund value on 25 May 18 at the existing NAV of Rs. 441.631 was Rs. 42.51 Lakh.
Capital Protection: We recommend that the investor protect his capital and its gains when his financial goal as per financial goal planner up to 18 months away by switching from equity to liquid or short term debt fund.
Deduction: A salient point that emerged was that in case SIP was topped up or stopped, the variation in investment cost was 32.85% from regular SIP. However, the unit allotment and consequent market value of the investment varied by 41.5%. Therefore, by topping up investments during falling markets, the investor gains by getting better returns due to additional allotment of units. It is not favorable for him to stop his SIP during this phase.
As a certified financial planner we guide our clients that SIP is very easy and suitable option for investor who can not do one time or big amount investment. You can invest in a disciplined and phased manner using SIP (Systematic Investment Plan).
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