January 28, 2009
Nowadays, a question that investors routinely pose to the Personalfn financial planning team is – “should I discontinue my SIP”. The downturn in equity markets has adversely affected the performance of equity funds. With portfolios languishing in negative territory, expectedly, investors are a worried lot. Some investors have concluded that now is a good time to discontinue ongoing SIPs. Is that the right strategy to adopt? Before discussing the same, let’s understand what an SIP (systematic investment plan) is and how it functions.
How an SIP works
Investing in a mutual fund via the SIP route entails making investments (often in smaller denominations) in a staggered manner as opposed to making one-time (lump sum) investments. This aids investors benefit from market volatility by lowering the average purchase cost. In an SIP, each installment i.e. a fixed sum of money is invested at the prevailing NAV (net asset value) on a predetermined date. In times of volatility, when the underlying fund’s NAV falls, it leads to a higher number of units being credited to the investor’s account.
For example, Rs 1,000 invested at an NAV of Rs 50, will result in 20 units being credited to the investor. However, should the NAV fall to Rs 40 in the subsequent month on account of turbulent markets, the investor will gain by receiving a higher number of units. In the process, the average purchase cost will fall as well.
An SIP investment makes market timing irrelevant. Timing markets involves attempting to make investments when markets are at their lowest and exiting at the peak. It’s a different matter that timing markets and doing so consistently is beyond most investors. By spreading investments over a period of time, the SIP mode does away with the need to time markets.
Finally, the downturn in markets has meant that several stocks are available at attractive prices. Also, the potential of the domestic economy to deliver over the long-term remains unchanged.
Now let’s come back to the original question – should investors discontinue their ongoing SIPs? Clearly, the discussion above suggests that now is the time to invest via the SIP mode, rather than discontinue ongoing SIPs.
The flipside
However, there is a need to understand that an SIP is a ‘means’ to achieve an end and not an ‘end’ by itself. In other words, the SIP should be aimed at helping investors achieve their predetermined financial goals. An SIP in isolation (i.e. one which doesn’t form part of a broader financial plan) or one in a poorly managed fund is unlikely to aid investors. The fund also needs to be right for the investor i.e. it should suit the investor’s risk profile and be equipped to aid him achieve his financial goals. Simply investing via the SIP route doesn’t eliminate the shortcomings of a fund or improve its prospects for the matter.
It is also pertinent that the SIP runs over a sufficiently long time frame. Often, investors are guilty of investing in a 6-Mth SIP, simply because, that is the minimum tenure offered by fund houses. Like investing for the long-term is pertinent in the case of equity investments, it is also important the SIP runs over the long haul i.e. at least 2-3 years. This can aid the SIP witness a falling market and deliver on the critical aspect of lowering the average purchase cost.
What investors should do
In conclusion, it can be stated that there is no standard answer for the query – should I discontinue my SIP? It would depend on the facts of each case. Although the benefits of investing via the SIP mode cannot be disputed, several factors need to be considered before making an investment decision.
For instance, investors who have the ability to take on risk, a sufficiently long investment horizon (at least 3-5 years) and are invested in funds that are right for them need not discontinue their ongoing SIPs. Conversely, others would do well to conduct a thorough assessment of their investments. The investment advisor has an important role to play in aiding investors with the latter. The key lies in not evaluating SIPs in isolation and thus making informed investment decisions.
Nowadays, a question that investors routinely pose to the Personalfn financial planning team is – “should I discontinue my SIP”. The downturn in equity markets has adversely affected the performance of equity funds. With portfolios languishing in negative territory, expectedly, investors are a worried lot. Some investors have concluded that now is a good time to discontinue ongoing SIPs. Is that the right strategy to adopt? Before discussing the same, let’s understand what an SIP (systematic investment plan) is and how it functions.
How an SIP works
Investing in a mutual fund via the SIP route entails making investments (often in smaller denominations) in a staggered manner as opposed to making one-time (lump sum) investments. This aids investors benefit from market volatility by lowering the average purchase cost. In an SIP, each installment i.e. a fixed sum of money is invested at the prevailing NAV (net asset value) on a predetermined date. In times of volatility, when the underlying fund’s NAV falls, it leads to a higher number of units being credited to the investor’s account.
For example, Rs 1,000 invested at an NAV of Rs 50, will result in 20 units being credited to the investor. However, should the NAV fall to Rs 40 in the subsequent month on account of turbulent markets, the investor will gain by receiving a higher number of units. In the process, the average purchase cost will fall as well.
An SIP investment makes market timing irrelevant. Timing markets involves attempting to make investments when markets are at their lowest and exiting at the peak. It’s a different matter that timing markets and doing so consistently is beyond most investors. By spreading investments over a period of time, the SIP mode does away with the need to time markets.
Finally, the downturn in markets has meant that several stocks are available at attractive prices. Also, the potential of the domestic economy to deliver over the long-term remains unchanged.
Now let’s come back to the original question – should investors discontinue their ongoing SIPs? Clearly, the discussion above suggests that now is the time to invest via the SIP mode, rather than discontinue ongoing SIPs.
The flipside
However, there is a need to understand that an SIP is a ‘means’ to achieve an end and not an ‘end’ by itself. In other words, the SIP should be aimed at helping investors achieve their predetermined financial goals. An SIP in isolation (i.e. one which doesn’t form part of a broader financial plan) or one in a poorly managed fund is unlikely to aid investors. The fund also needs to be right for the investor i.e. it should suit the investor’s risk profile and be equipped to aid him achieve his financial goals. Simply investing via the SIP route doesn’t eliminate the shortcomings of a fund or improve its prospects for the matter.
It is also pertinent that the SIP runs over a sufficiently long time frame. Often, investors are guilty of investing in a 6-Mth SIP, simply because, that is the minimum tenure offered by fund houses. Like investing for the long-term is pertinent in the case of equity investments, it is also important the SIP runs over the long haul i.e. at least 2-3 years. This can aid the SIP witness a falling market and deliver on the critical aspect of lowering the average purchase cost.
What investors should do
In conclusion, it can be stated that there is no standard answer for the query – should I discontinue my SIP? It would depend on the facts of each case. Although the benefits of investing via the SIP mode cannot be disputed, several factors need to be considered before making an investment decision.
For instance, investors who have the ability to take on risk, a sufficiently long investment horizon (at least 3-5 years) and are invested in funds that are right for them need not discontinue their ongoing SIPs. Conversely, others would do well to conduct a thorough assessment of their investments. The investment advisor has an important role to play in aiding investors with the latter. The key lies in not evaluating SIPs in isolation and thus making informed investment decisions.
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