SIP is an investment process which allows you to invest a fixed sum every month very much like a recurring fixed deposit with bank.
SIP is an automatic mode of investment which removes the ills of market timing from investments. Investors usually desist buying mutual fund when the markets are down and rather buy when markets are high, in other words retails investors buy high and sell low—just the opposite of what they should be doing.
We have realized that the retail investor has gradually built some mis-conceptions about equity investments via the SIP mode.
Myth 1:- Equity investment is all about SIP
Investors have started to believe or rather they have been made to believe that equity investment should always be done in SIP mode. We believe that if the investor is mature enough to understand the nuances of equity investing and is willing to stay invested for 10 years or so then lump sum investing may be made rather than SIP mode. SIP mode can be beneficial if say the investment horizon is about 5 years or thereabout.
Myth 2:- SIP works in direct equity
We have come across many articles which advocate buying shares of a certain value every month saying and terming it as SIP. Sadly enough this is not SIP.
Take Himachal futuristic Co. Ltd. (HFCL). The script had moved from about Rs. 20 to Rs.2500/- in a matter of a year and back to Rs. 20 levels in following year. Or for that matter take the case of Silverline Technologies which moved from Rs. 30 to Rs. 1300 to Rs.7/-. The moot point is whether you would have had the strength to continue buying through this period. Imagine starting purchases at Rs. 1300/-. You would be cursing stock market today (nobody likes to believe that they have made a mistake). SIP or concept of rupee cost averaging works with a portfolio and not a single stock.
Myth 3:- SIP works For Anybody But Me.
SIP works well in a well diversified equity fund and that too over long term. It may not work well only for people who either have a short term horizon or have not chosen a fund with good track record.
Myth 4:- Markets are at all time high and so not a good time to start an SIP.
We do not know whether 3000 is the right index level or 18000 is the right index level to start an SIP. However, what we do know is that SIP works. SIP returns vis-a-vis lump sum returns of select funds between the period December 2007 and March 2011 have been stated here below:-
Scheme | Period | SIP return (CAGR) | Lump Sum return (CAGR) |
DSP BR Equity Fund | 1st. December 2007—1st.March 2011 | 20.69% | 6.25% |
HDFC Equity Fund | 1st. December 2007—1st.March 2011 | 28.45 | 10.01 |
Reliance Growth Fund | 1st. December 2007—1st.March 2011 | 17.71 | 2.79 |
IDFC Premier Equity Fund | 1st. December 2007—1st.March 2011 | 24.30 | 8.99 |
Franklin Prima Plus | 1st. December 2007—1st.March 2011 | 19.19 | 3.80 |
So, it is time we break the myths about investing in general and SIP in particular. Let SIP be the second earning member of your family.
Happy SIPing!!