Understanding why SIP is the best investment strategy for some ...

Read my article on why SIP is considered to be best, but also keep in mind why and for whom ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/14092015/14092015-md-gm-14.pdf


The English translation is as under:

“SIP is the best investment strategy” – an expert was speaking on the television. A friend sitting next to me asked, “Does it mean that investment through Sip would always fetch higher returns? Or at least most of the time?”

Well, the question is logical. Our mind interprets information in a predictable manner. The moment an investment is mentioned with the adjective “best”, we interpret as something that is likely to offer highest returns. This is true for majority of investors.

However, this is not always true. Very often, there are other parameters that make an approach better than other options.

In the past, we have discussed about SIP – Systematic Investment Plan. It is an approach that allows an investor to systematically and regularly invest a predetermined amount of money into a chosen mutual fund scheme. This ensures discipline – critical for investment success.

Apart from discipline, SIP is ideal for a long-term approach to investing by most people, who earn regular income. Simply because the income stream is regular (monthly salary), one has a need to invest regularly. SIP allows just that. A single instruction to the mutual fund company and your bank and all your monthly savings go into the scheme you have selected – no hassles of wondering which scheme to select every month, no hassles of filling up forms and signing cheques every month.

That is what makes it the best in terms of offering great convenience to fulfill a need to invest on a regular basis.

Apart from that SIP also helps accumulate a corpus through the benefit of compounding, if you stay invested in the scheme over long term. Compounding works wonders over long periods of time. as the corpus grows, slow and steady, the future returns on the grown corpus add up to large amounts. For example, if you have invested Rs. 10,000 per year in a scheme that offers 8% p.a. and you keep reinvesting all the earnings in the scheme, the earning in the 11^th year would be Rs. 11,589. However, if you continue for another 10 years, the earnings in the 21^st year would be Rs. 36,610. By the way, in the 31^st year, the earning would be Rs. 90,627. You can see the magic happening here. Longer you stay invested, higher the benefit of compounding.

Just as an additional benefit, if you are investing in an equity fund through SIP, it would allow you to make the inherent volatility to work for you. As we all know, the prices of equity shares go up and down regularly. When you are investing a fixed sum of money in an equity fund, you buy fewer units when the prices are high and you buy more when the prices are low. This happens automatically. Let us see with some numbers. Assume that you are investing Rs. 10,000 per month. In the first month if the NAV of the fund is Rs. 20, you buy Rs. 10,000 / Rs. 20 = 500 unitss. If the NAV goes up to Rs. 25 in the next month, you would buy only 400 units (Rs. 10,000 / Rs. 25). At Rs. 25, you bought 400 units and at a lower price of Rs. 20, you bought more units. This brings down the average purchase price of the units. When your purchase price is low, the returns are better (as compared to buying at higher price) – and this is common sense.

These are the features that make SIP an ideal investment approach for those in early stage of life, earning regular income and are investing for a long-term goal, far in future.

Wish you a happy and fulfilling life.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.