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| Mr. Anil Rego, |
Good averaging in a Volatile market
by Mr. Anil Rego, CEO & Founder, Right Horizons
SIPs or Systematic investment plans have suddenly caught the fancy of the average investor. It must be noted that an SIP is often misunderstood as an investment avenue by itself. But actually it is a mode of investment ideally suited for investing in equities given their inherent volatility. Equities are essentially a long-term story with a time frame of not less than 3-5 years.
It is an investment mode wherein typically a specific amount is invested into the underlying scheme at regular intervals – weekly, bimonthly, monthly, quarterly, etc.
The SIP is a simple arrangement that works like a recurring deposit. This mode of investment is generally used for equity-related instruments and enables rupee cost averaging. You can start SIPs for a sum as low as R 250 per month. There is also the option of daily SIPs of R 50 per day but that is for those who need that flexibility. SIPs can be easy on one’s pocket and can create a disciplined approach towards investing.
Essentially, the SIP provides the benefit of cost averaging and lowers risk significantly.SIPs offer the benefit of buying more units during a market downturn and less units at market peaks, and thus work as an interesting way of reducing your downside significantly. The cost averaging works best in a falling market scenario because this way the investor can average out his cost of purchase. If the investor does not witness a downturn, he is exposed to a market rally only; the average purchase cost of his SIP will rise over a period of time. The equity market cycle is normally between a 3 year and 5 year horizon. No bull or bear run has lasted more than this time frame and there could be sharp intermediate glitches as well over such period.
A person who has patiently waited out over such a horizon is likely to benefit by clocking decent returns.With equity markets taking a tumble, and when one is a little unsure of whether there could be further downsides, an SIP is a good option to use. If you have a lump sum surplus, one could use the STP (Systematic Transfer Plan ) route. The lump sum amount could be invested into a liquid fund along with an STP instruction. This would ensure that money is systematically transferred into an equity fund over a period of your choice. Higher frequencies like weekly transfers would provide good averaging in a volatile market.
Decide how much amount you will be able to commit towards regular investment. You can initiate an SIP with as less as Rs. 100 to Rs. 250 per month (most plans, however, start at Rs. 500 per month).
The minimum number of instalments for an SIP is six. There are innumerable funds available in the market and diversified investments across funds are a good option. Do consult an expert if you are unable to figure out by yourself.If you are going for the systematic route for investment, then there is no requirement to time the market – you can invest in a regular/disciplined manner to optimise on your returns. Systematic investments are also best used for assets like gold that have run up and would provide a cushion against a fall. And yes, most importantly, do not stop your SIPs even if they show negative returns.
You would eventually benefit from the volatility, provided you keep investing over a market cycle. The longer the tenure, the better for the SIP. It shows best results over 3 to 5 years considering market cycles. You can also invest for 10 years or more. Remember: Most of the magic in systematic investments happen only at the end. So it is time you gave the systematic route of investments a thought.
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