The last few months have been a roller-coaster ride for
investors, with the Sensex posting double-digit returns in the first five weeks
of 2012, negating, to an extent, the negative return of 24% for 2011. This
takes us back to the saying —investment is like watching the paint go dry or
see the grass grow green. Disciplined systematic investment to reach your
financial goals is the approach that is advocated and, today, increasingly
gaining ground. Systematic Investment Plans (SIPs),are an excellent tool in
this regard.
How SIPs work. On a regular systematic basis, either on a
daily/weekly/monthly/quarterly basis, you decide to invest a specific amount of
money into an instrument of your choice (in this case, equity mutual funds). On
the basis of regular flow of money in SIP, the fund manager of the MF house
invests in the equities.
SIP — the story from 2010. If you had invested in early 2010
in diversified equity MFs and continued to invest, the current situation would
be similar to what is being experienced by Ramchandra who had started his SIPs
in January 2010 in two of the then top performing equity MFs.
His investment horizon was for 10 years for his children’s
education. He used to review his investment on a yearly basis. In December
2010, his investments had generated close to two- digit return. He was glad
that his tryst with equity was on track. However, 2011 was a totally different
story. With every passing month, he could see his investment value go down.
However, he also noticed that now, more units were being purchased. But he
still could only see that his investments were in red. He started to
internalise this situation and mentally made a note — sell the investments the
moment the value equals the acquisition price. This, he would do without
stopping the current SIPs in progress. When he reviewed his investments in
December 2011, he was more than sure that he would follow this path. Now cut to
January 2012. He saw his SIP investments were back in positive territory. He
kept thinking whether to exit the plan or stay invested. This was when he
decided to get in touch with financial advisor Aditya.
Analysis. The first question Aditya asked him was whether
his investment was tied to a goal with a time horizon? Aditya explained that
when he initiated the SIPs in early 2010, the equity market was moving up. That
is why his SIP investments were growing in value. Midway though 2011, the
equity markets had been volatile and generally in a negative zone. So, in a
falling market, the value of his investments (which was invested in a rising
market) was also falling.
However in early 2012, when the markets again started to
move up, the value of his investments also started moving up. As Ramchandra had
continued his investment, he was able to purchase more units in a falling
market. This had a domino effect, as the market started moving up, his
disciplined SIP investments started to move up in value.
In the prolonged equity bull run of 2003-07, the SIP
investments were only reflecting one result —positive return. Post the economic
crisis of 2008, the equity markets have been displaying a volatile trend. A
brief period of uptrend, followed by a period of downtrend and, again, a rising
trend, with intermittent periods of sideways movement. This is a very unnerving
experience. It was because of this that Ramchandra was having his doubts. Now,
Ramchandra has experienced, within a period of 26 months, what many investors
did in their investment cycle, during the early part of the decade.
Now that Ramchandra has experienced the volatile cycle of
his investments at an early stage of his investment cycle, he had more answers
to his posers and started to view things differently. He wants to build a
corpus over multiple time periods, in a disciplined manner, and SIPs are a
convenient and easy-to-invest mode Secondly, to view the investment with a goal
and time horizon and to embrace volatility.
Source: http://www.financialexpress.com/news/sip-an-excellent-tool-to-help-achieve-longterm-goals/911823/0
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