Systematic Investment Plan (SIP): Advantages & Good time to start a SIP?

What are the advantages of a systematic investment plan (SIP)? Is it a good time for starting a SIP?
-Subhash Raj, Bhopal

A Systematic Investment Plan or SIP allows us to take advantage of the growth potential of stock mutual funds, even if we do not have a large sum of money to invest. Infact most mutual funds require a minimum of just Rs.500 per month to get started.

Most of us are used to paying for a car or home purchase with monthly EMIs (Equated Monthly Investments). Think of a SIP investment along those lines – only, you are paying yourself a monthly sum, and investing in the stock market, to build long-term wealth!

Advantages of a Systematic Investment Plan

You can budget for a SIP investment every month if you are say, looking to invest only a small amount on a regular basis.

Even if you have a lump sum to invest, you may not want to invest all of it at one go. And a systematic investment plan where you spread out the investment in the stock market over several months can provide several advantages. It will help you mitigate market risk and volatility. It helps you test out the waters and build your portfolio one step at a time.

Please look carefully at the table above. It becomes clear that most importantly, a systematic investment plan provides the benefits of what is called “rupee cost averaging”. In other words, if the stock market goes down, your next payment will buy more units. And If the market goes up, your investment will increase in value.

So, What’s a good time to start a SIP?

We have seen record highs in 2007 and record lows too, in 2008. Now in June 2009, we are seeing a market that showed a remarkable recovery from the lows of as recent as March 2009. Will it sustain or go down again? No one knows. It is simply not possible to time the market accurately. If it was that easy all the fund managers would be sitting at home with their fortunes, isn’t it.

So, how do you decide when is a good time to start investing in a SIP? The answer is simple. Anytime is good. If you can maintain the discipline of making regular monthly investments.

Consider the graphic below carefully. We are looking at an example where a investor started at possibly the worst time in the recent history of our markets – February 2000 – at the peak of the dot-com bull market. He started investing Rs. 1000 every month in a composite fund (consisting of the 10 largest open-ended equity funds with 10 yr plus track records) and continued investing till Sep 2008.

With the hindsight knowledge of the huge fall from the dot-com/technology driven high of year 2000, its a good bet that nobody would have advised the investor to start a SIP at that time. But look at the annualised returns of 29% compounding even after starting just before the market crashed! Now that’s as good a record, as any.

So we can see that it really did not matter when he started. Neither did it matter as much that again in Sep 2008 the market was touching record lows. 2001 to 2003 was a sticky bear market. But that meant that the investor was actually buying units of the mutual fund at very low prices. His patience and discipline got rewarded when the market finally took off in 2003.

And again from Sep 2008 to Mar 2009, if he continued investing he would have purchased those units at low prices, and reaping the benefits now.

There is a lession from this history. That if you have a fairly long investing time-horizon – upwards of 5 years, at the least – a systematic investment plan can reap you huge rewards.

Now that you are convinced of the utility of a SIP, why SIP is a smart move, and why you need to be regular with your instalments, you are probably ready to invest.

Which funds to invest in through SIP?

If you have reached this far, I am sure you are already asking but hullo, how do I decide where to invest in, which funds have the potential to give me the best returns, which are the top rated funds, etc.?

Not to worry, check out the top rated funds at ValueResearchOnline a site dedicated to mutual fund investing that will give you all the answers you need, and more.

Good luck! Get started today!