Why SIPs are the way to go

Quite often, I come across investors who by their own behavior make investments more complicated than they actually are. If looked at with a clear mindset and proper understanding, investments – in both stocks and funds – are actually a simple matter. There are just a few basic rules that an investor needs to follow in order to make sure that his investments are functioning as per his requirements.

The one simple aspect of investing that quite a few people end up floundering is Systematic Investment Plans (SIP). The problem here is that many investors expect SIPs to be miracle tools. The expectations from SIPs are too high and too misconceived. The two most common misconceptions about SIPs are that they always generate more returns than lump-sum investments and that they can never turn in negative returns. Both of these points are misconceptions and extremely wrong.

Systematic investments are advocated by fund companies, experts and the media because SIPs ensure that an investor doesn’t fall into the trap of timing the markets. Stocks prices and fund NAVs are on the whole expected to go up but when and how they will go up is something that no one can predict, and shouldn’t even try to predict. The best manner of investing for a common investor is to put in an equal amount regularly. As time goes by, the SIP route will make sure that you end up buying more unites when the NAV is low and lesser when the NAV is higher. When you redeem, all the units will be worth the same but you’ll have purchased a higher number of units, hence making your returns higher as well.

As compared to this, in case of a lump-sum investment, you would be left with a certain number of units only, without having the advantage of buying cheap when the markets would have gone down. However, there can be instances when a lump-sum investment would have done better than SIPs, but you would come to know about this only in hindsight. This would happen when the markets don’t fall below the level that they were in when the lump-sum investment were made. This, we know, is a rarity. And in the longer run, SIPs always work better than lump-sums.

Most investors, especially salaried ones, wouldn’t have large amounts to invest in lump-sums anyway. The prudent thing for them to do would be to keep aside a fixed monthly amount to invest. And that for is the real benefit of SIPs. Our psyche has been tuned in such a way that we tend to invest when the markets are on a high and altogether stop investing when the markets are low. Apart from being another example of timing markets, this is the exact opposite of what we should be doing. Common sense says that stocks and funds or any investment should be bought at lower valuations and sold at higher ones. SIPs are the best way of ensuring that you do just that.

by : DHIRENDRA KUMAR

—Author is CEO of Value Research

Source: Financial Express