Equity markets seem to be very unstable and I can never figure out when to invest. Can a systematic investment plan (SIP) help me? For how many months or quarters will I have to invest? Should I stop somewhere or should I just carry on until I redeem from the fund? Should I book profit above the average cost? Manish Patel, via e-mail Investing in equity funds can often be a tough task. When markets move downwards, is it a good time to invest? Or will share prices fall further? When markets are high, how can it be determined if it will continue to reach higher levels or will it go down? In a volatile market the decision to invest or to hold back becomes even more difficult. Buy low, sell high, which is so easy in theory, is actually very difficult in practice.
An SIP option will solve this problem. SIP is an investment programme that allows small amounts of money to be invested at regular intervals. A pre-determined amount is automatically transferred from an investor's bank account and invested in the desired mutual fund. This investment can be done on a mon-thly or a quarterly basis.
With an SIP there is no need to worry about where markets are headed. Attempts to time the market can be avoided. Whether the market is rising, falling, or plain volatile, the ability to keep investing helps in reducing the average cost of investment. So, instead of reducing risk by trying to time the market, risk is reduced by investing in tranches.
Consider an SIP of Rs 1,000 every month into an open-ended equity scheme. Even under different market conditions the average cost per unit under SIP is always lower than the average purchase price per unit, regardless of what market conditions are. This can be seen from the table where an SIP is carried out over a rising as well as a falling market. Besides, this strategy allows you to make regular investments in small amounts, as the minimum investment is as low as Rs 500.
While investing in SIPs, serious consideration should be given to doubling the monthly investment during corrections, especially full-fledged bear markets. Emotionally, this isn't easy. But returns will improve vastly when markets bounce back. While considering an SIP plan, it should also be remembered that this does not ensure profits or protect against a loss in a declining market. It does smoothen out the market ups and downs and reduce the risk of investing in a volatile market.
As far as the number of years you should invest for, it depends on the amount of money you wish to deploy, and the time over which this amount will be deployed. Your decision to exit from the scheme will depend on when the market rewards you and that the returns meet your investment target. Irrespective of the method of investing (systematic investment) or one-time, we suggest that you be prepared for an investment horizon of at least three-five years.