How do SIPs help?

The concept of SIP is similar to recurring bank deposits wherein investors contribute a fixed sum of money at regular intervals

All market-linked investments go through ups and downs. To create wealth over the long run, a disciplined, far-sighted approach is critical. In this context systematic investment plans (SIPs) can be a preferred option. The concept of SIP is similar to recurring bank deposits wherein investors contribute a fixed sum of money at regular intervals.

Advantages of SIPs

Negates the need to time the market: SIP’s biggest advantage is that it negates the need to time the market. In timing the market, one can miss the larger rally; one may stay out in a bull phase or may just enter when the market is entering the bear phase. In a nutshell, one can never accurately predict how the market may behave in the future.

Investing at regular intervals ensures that one is invested both at the high and the low points of the market. It also helps in averaging out the cost per unit called as ‘rupee cost averaging’.

For example, with Rs 1,000, one can buy 50 units of the underlying asset at Rs 20 per unit or 100 units at Rs 10 per unit depending on whether the market is up or down. More units are purchased when markets are down and fewer units when the market is up, which averages the cost. The longer the time frame, the larger are the benefits of averaging.

Inculcates discipline: Disciplined approach to investment is crucial for fulfillment of financial goals. With SIPs, investors can invest small amounts regularly compared to lump-sum investments which may be impacted by market timing.

Lighter on the wallet: SIPs help investors to choose an investment amount that is within their financial means. This is mainly true for SIPs in mutual funds which can be started for as low as Rs 500 per month.

SIP in equity shares or mutual funds

While SIPs in equity mutual funds are more popular, there are a few brokerages that offer the opportunity to invest through SIPs in equity shares (stock SIP). Under stock SIP, investors can buy single or multiple stocks at a defined frequency (e.g. monthly). Investors can specify the investment amount to be used to buy stocks at this frequency. Investors can even opt for quantity-based stock SIP where they can buy the same number of shares at a pre-determined frequency. While the latter is a

disciplined investment, it may technically not be a SIP as the quantity does not vary with costs.

SIP in equity shares Vs equity mutual funds.

While SIP in stocks inculcates the inherent discipline of saving regularly and over a longer period, the process requires more dedicated involvement than that required by SIP in equity mutual funds. When you invest through stock SIP, you have to depend on your stock picking abilities and ensure that you choose stocks that will perform well consistently. This leaves room for risky investments. One the other hand, by investing in equity mutual funds, you can diversify across a basket of stocks –underperformance by one or a few stocks is likely to be offset by the better performance of others. So for the retail investor, especially those unable to closely monitor the market and the various stocks, it is prudent to stick to the well regulated, transparent and professionally managed mutual funds to maximise returns in the long run while the more knowledgeable investors can opt for stock SIP.

Source: Crisil Fund Insights-Monthly funds newsletter from CRISIL Research