Want to join D-Street rally? Take SIP route to beat volatility
What is an SIP, you wonder! It is a method to periodically invest some amount of money in a mutual fund of your choice to serve your long-term financial goals.
At a time when the benchmark indices Sensex and Nifty50 are scaling fresh highs by every passing day, there is one route that the retail investors can still consider joining the rally: Systematic Investment Plan or SIP.
SIP route has, in fact, significantly contributed to the record run Dalal Street has witnessed so far even as valuations look expensive.
What is an SIP, you wonder!
It is a method to periodically invest some amount of money in a mutual fund of your choice to serve your long-term financial goals. You can start a SIP with as low as Rs 500 and the period could be daily, weekly, monthly, quarterly or yearly. Monthly is the preferred choice. Some mutual funds offer micro-SIPs too with a cap of as low as Rs 100.
Data from the Association of Mutual Fund Industry (AMFI) shows the MF industry has added, on an average, about 9.26 lakh SIP accounts each month during the financial year (FY) 2017-18, with an average SIP size of about Rs 3,300 per SIP account. Over 47,000 crore was collected through SIP in FY18 as compared to nearly 44,000 crore collected in FY17.
Here's what you must know about SIPs:
SIPs must be goal-based
One must identify one's financial goals before starting an SIP, and accordingly zero down on a specific mutual fund. Specific goals help one not only choose mutual funds correctly, but also keep track of them in a better way. Various kinds of mutual funds, for example, diversified, large-cap, midcap, smallcap, sectoral funds and index funds etc are available in the market. These must be selected depending upon the term and the negotiability of the goal.
Commission charged on MFs
There are no free lunches! Mutual funds charge commission on the intellectual and logistical services they provide to investors. How much administration and fund management cost, expense ratio, exit load etc is going into your mutual fund scheme must be taken into account because what may look like a small commission could add up to a big chunk in many years, diminishing your returns.
Volatility is SIP's best friend
So long as your financial goal is not met, you must not close your SIP even if the market is trading at all-time high. SIP reduces the risk of volatility as it averages out your investment. For example: On 30 December 2010, the Sensex quoted 20,389 points, and on 12 December 2007, it was at 20,376. While the Sensex remained at the same level during this period, an investment via SIP would have incurred a profit of over 22 per cent.
SIPs best way to 'time' the market
Nobody knows for sure when the market will go up and down. Market experts keep saying that timing the market i.e. selling at peak and buying at bottom is futile. With SIPs, one doesn’t need to worry about higher or lower market levels. While investing lump sum is inadvisable at peak, but SIPs can be kicked off any day.
"It is the time you spend in the stock market that matters and not the timing" noted Vikek Law, Founder, CEO & Editor-in-Chief, The Money Mile, in his book The Money Book, quoting market experts.
Disclaimer: This story is for informational purposes only and should not be taken as investment advice.