During my guest lectures at business schools, I often encourage students to debate whether a mutual fund is the ideal investment vehicle for retail investors and whether systematic investment plan (SIP) is an optimal strategy.

Ironically, with the markets having turned extremely volatile after a disappointing Union budget that created more problems than it solved, the same questions seem to be plaguing the minds of retail investors across India.

With the Sensex plunging, IIP numbers turning negative, inflation flaring, the rupee falling to new lows and the crisis over Greece’s exit from the euro approaching a dangerous turn, Indian investors, like their contemporaries world over, are seeking solace in low-risk asset classes.

The only consolation at this moment, although perhaps temporarily, is the fall in crude oil prices to below $100 per barrel.

Rocked by markets

While retail investors had not really returned directly to the equity markets after the stocks got pummelled in 2008, those who had chosen to participate in equities through mutual funds seem to have had enough and are migrating lock stock and barrel to low-risk debt mutual funds and, unwittingly perhaps, to the relatively high-risk gold mutual funds.

What is worrisome for the equity segment of the mutual fund industry is the fact that even those investors who have opted to systematically invest in equities seem to have been unnerved by the falling markets.

Bearing testimony to this observation is the fact that the equity investor base has shrunk 1.6 million to 37.65 million in 2011-12 from 39.29 million in 2010-11.

However, this to my mind, is a fallacious route being adopted by investors who should at best reduce their equity exposure in the total asset allocation plan, if at all, to the lower threshold rather than exit entirely.

This is because though returns from equities tend to be lumpy once an upswing commences, the returns escalate almost in a geometric progression.

Hence, while there are periods of extreme pain, those investments in equity inevitably provide its ability to be the outperforming asset class over longer time frames.

It can safely be said that more often than not, investors with the risk appetite and patience to remain invested and bear the shocks that equities tend to provide in the interim, will in fact benefit from investments made at market declines.

Nothing to lose

By investing in SIPs, investors are able to even out their input costs as units are purchased across good and bad market conditions.

In fact, in a falling market, one is able to get a larger number of units for the fixed sum invested than in a rising market. This lowers the average acquisition cost, which in turn boosts returns when the markets bounce back.

SIP investments also ensure investment discipline and patience and, hence, reduces the exposure to daily market volatility and market timing. Since SIPs can be done with as small an amount as Rs 500, one can start with a small saving and get the advantage of the power of compounding.

Overall, it makes good sense for investors to commence SIP in a handful of good schemes across market capitalisation categories and stay invested through thick and thin.

Right timing

Finally, investing as an activity is only fruitful if you know when to sell. Hence, while earmarking the time frame for your SIP investment, also earmark a target corpus and exit once it is achieved.

To conclude, investing is a complex activity and requires a certain level of detachment and clinical precision to achieve success. Systematic investment planning provides a headstart to this endeavour.

The author is the founder-promoter of Lotus Knowlwealth and Gurukshetra.com. He can be contacted at info@gurukshetra.com