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Monday , December 17 , 2012
Since 1st March, 1999
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SIP and simplicity

There is a permanent now when it comes to investing through systematic investment plans (SIP), all you need is a bit of faith and discipline

So far this year we have received over 5,000 mails seeking recommendations for the best SIPs to invest in. It was natural for us to address an issue which bothers so many of our readers.

Increasingly, the belief among people who skim the financial media is that SIPs are a magical device, akin to the blessings of a godman.

They start assuming that SIPs are guaranteed to produce profits no matter when. They also believe that they can stop SIPs whenever they feel like and again start them at the time of their own choosing and the God of SIPs will protect them.

There are two widespread misconceptions about SIPs: some investors believe that an investment through the SIP route cannot have poorer returns than a lump-sum investment made at the same time that the SIP was started.

The other, more extreme point-of-view is that you can't make a loss in an SIP, no matter what. Both are equally wrong, or perhaps the second one is more wrong than the first one.

At Value Research, we like simplicity. We place simplicity and obviousness at the heart of our investment approach, which is simple and understandable. This belief holds even in the unlikely case of the complicated one giving better returns.

SIP is a simple and straightforward idea. You invest a fixed sum regularly in an equity fund, regardless of market conditions. Over a long-term, you end up buying more units when the markets are down and fewer when the markets are up. Your average price of acquisition is inevitably lower than what it would have been had you tried to time the market by trying to predict and anticipate its movements. Instead of trying to time oneís investments, one should regularly invest a constant amount.

Beyond the arithmetic of returns, there is another reason why SIPs make sense. They are a great way to override the normal psychological instinct to stop investing when prices fall.

In our experience, this is the real value of SIPs. The normal tendency is to invest more when prices are high and to stop investing when prices fall. This is the opposite of what is the most profitable way of investing. SIPs force you to follow the opposite approach, much to your eventual benefit.

Every investor has different needs, requirements and investment concerns, which makes it impossible to generalise five funds that will work for all of them. Based on the typical investor need, there are different combinations of SIPs that one can invest.

The rationale for such an approach is multi-pronged; when you start investing through SIPs, you get interested in your investment, which forces you to look up and select the best quality fund to invest in. The concern and interest in your investments forces you to select a quality fund to invest, which you closely track and follow.

First-time investors will do good with a SIP portfolio of balanced funds such as HDFC Prudence, BSL 95, Reliance Regular Savings Balanced, Tata Balanced and Canara Robeco Balance.

Whereas, investors looking for reasonable growth with stability could consider Quantum Long Term Equity, HDFC Equity, Templeton India Equity Income, UTI Equity and SBI Bluechip.

Aggressive investors have the choice to invest in ICICI Pru Discovery, IDFC Premier Equity, HDFC Mid Cap Opportunities, SBI Magnum Emerging Businesses and DSPBR Micro Cap.

The advantage of all these SIP portfolio is the diversification and varying risks that comes with investments that investors can fit to suit their individual needs.

By now you would have understood that SIPs are no sure shot way to profits. There are circumstances in which a lump sum investment can (in hindsight) prove to be better. However, over any longer period, such cases are rare.

Generally, over a long period of time, the ups and downs of the market will ensure that SIP has the better returns.

You should have a methodical withdrawal plan for your SIP investments. You have the flexibility to do so through a systematic withdrawal plan, to meet your cash flow or financial needs and there is also the redemption route as and when your SIP investment has achieved the goal that you are investing for.

The other possibility to exit an investment is when the fund that you are investing in is either not faring well or no more suits your investment profile.

As an active SIP investor, you will face instances when your SIPs in even the best funds would turn losers. Even SIPs that have been running for long periods could get into losses or barely break even.

The point of SIPs is that you keep buying at all levels ó high and low ó regardless of what your instincts urge you to do or the direction the markets take. The nuances of SIP investing can be endless, but the strength of SIP lies in its simplicity. Donít get bogged down by the noise and clutter.

The author is CEO of Value Research Online