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What's So Great About SIP?

If a person has the cash to put all money in at one go and wait for a long period, then isn't that investment similar or better then SIP? Then why is SIP being projected as if it was the next coming of God? —Dr. Manish Dave

If a person has the cash to put all money in at one go and wait for a long period, then isn't that investment similar or better then SIP? Then why is SIP being projected as if it was the next coming of God?
-Dr. Manish Dave


Whether putting all the money in lump sum proves to be a better bet than a SIP will depend upon the time at which you invest. If the markets witness a bull-run subsequent to your lump sum investment, then definitely a SIP will not beat the returns of such an investment. But a post-mortem of the stock market is much easier than predicting it.

Thus, one can easily say now that "Only if I would have invested in lump sum ten months ago rather than wasting time in a SIP", but the fact is that there is no definite measure to be sure of a bull-run in advance. Therefore, while systematic investment plan may not be the next coming of God, it does ensure that an investor does not need the god-like powers of divination and be able to foresee the future in order to invest well.

The fact is that since you do not know whether the market will rise, fall, hold or fluctuate, SIP covers all bases better than lump-sum investment. This is demonstrated not just by hypothetical calculations but by a real track-record.

You can use our tool for comparing SIP and non-SIP returns at https://www.valueresearchonline.com/learning/CalcSIPReturn.asp.

One might argue that when I am investing for a long term, then why should I look at the short term gains or losses? Well, the fact is that when a sizeable part of your hard earned money is on the line, then every percentage fall in the value of your investment can lead your heart to skip a beat or two.

A lump sum can often 'induce' you to act. For example, a two per cent fall subsequent to a huge investment can easily shift the focus of an individual towards 'avoiding further loss', thus inducing him to exit the market.

Logic suggests that you should spend your time making investment decisions in proportion to its contribution to your income.

However, many people waste their time in trying to time the market at the cost of their primary source of income. And we call it a waste of time because at the end of it, you are still not sure whether you have really invested at the bottom of the market. In such a situation, a SIP provides the easiest and the most feasible solution. Apart from this, some added advantages like waiver of the entry load also contribute a bit to the returns.

Lastly, if a person is investing for the long term, as mentioned by you, then what is the hurry to put all the money at one go?

A better option will be put the money in a safe fund, like a floating rate fund, and subscribe to a systematic transfer plan in the chosen equity fund. This will provide the benefits of a SIP, and some returns on money, otherwise lying idle for the time being.



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