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Lower losses with SIP

With most technology funds hitting the market around the peak of the rally, returns from a one-time investment look especially abysmal vis-à-vis those generated from systematic investments.

Call it the power of systematic investing! Even as technology funds were battered in 2000, investors with periodic investments have been better off than their counterparts with a one-time investment. With most technology funds hitting the market around the peak of the rally, returns from a one-time investment look especially abysmal vis-à-vis those generated from systematic investments. So, what is systematic investment (SIP) or rupee cost averaging? When you consistently invest the same amount at regular intervals under SIP, your average cost per unit works out to be lower than the average market price, irrespective of the market being rising, falling or fluctuating. The same is not true in the case of one time investment.

Thus, had you put Rs 10,000 in Alliance New Millennium on April 7 at a NAV of Rs 11.69, you would have bought 855.43 units. With the current NAV of Rs 7.99, the value of investment stands at Rs 6,835, which translates into a loss of 31.65 per cent. Now, contrast this with a systematic investment plan in Alliance New Millennium. Had you spread Rs 10,000 across 10 months (investing on the 7th of every month till January 7), your investment in the fund would have been worth Rs 9211.49 today with a capital loss of only 7.88 per cent! With periodic investments in the fund, you bought 1152.88 units since a lower NAV (compared to April 7 level of Rs 11.69) on certain occasions resulted in an allocation of larger number of units.

Ditto is the case for other technology funds. For instance, a one-time investment in Birla IT would have resulted in a loss of 46 per cent while a SIP in the fund would have slashed the loss by half to 23.23 per cent. Or take for instance, Kothari Pioneer Infotech Fund, where your investment would have eroded by 34.62 per cent had you put Rs 10,000 in one go in April. On the other hand, SIP would have limited your loss to 12 per cent.

However, systematic investment should not be perceived as a short-term investment tool. Last year was exceptional since the NAVs of technology funds continued to fall and hence, SIP investors were fortunate to corner an increasingly larger number of units every month. Had it been a rising market, a periodic investor would have received a lower number of units every month as the NAV continued to move up. Thus, an investor with a one-time investment would have fared better over such a short-tenure. Nonetheless, systematic investment plan not only preserves capital; it also translates into substantial wealth creation in the long-run since it helps you ride the intermittent volatility on the bourses.

All the mutual fund houses in India offer SIP in their open-end funds with minimum investments per month ranging between Rs 500 and Rs 1000. Thus, you just need to set aside a certain minimum amount every month for investing in the fund of your choice. Add to it, you merely need to give post-dated cheques to the fund house. So, reach out for your cheque book and invest without fear in a technology fund.

The Power of SIP Value of Investment (Rs.)  Loss on Investment (%) 
  Funds  SIP*  One-time*  SIP*  One-time*
  Alliance New Millennium 9211.49 6834.90 -7.89 -31.65
  Birla IT 7676.09 5396.52 -23.24 -46.03
  Chola Freedom Technology 9342.33 6665.01 -6.58 -33.35
  IL&FS eCOM 8533.36 5642.63 -14.67 -43.57
  Kothari Pioneer Internet 8786.16 6537.46 -12.14 -34.63
  Kothari Pioneer IT 8966.28 7589.97 -10.34 -24.10
  Magnum IT 8976.42 6438.03 -10.24 -35.62
  Pru-ICICI Technology 8274.23 5429.65 -17.26 -45.70
  Sun F&C Emerging Tech. 8944.70 7227.49 -10.55 -27.73
  Tata IT 8233.47 5843.91 -17.67 -41.56
  UTI Software 7217.17 4657.28 -27.83 -53.43
* Of Rs 10,000 on Jan 19, 2001
# Investments since April, 2000