SIP for You or You for SIP

SIP for You or You for SIP ?

Confused ?

Ask yourself why you invest. It is because you require it or is it because you are seeing everyone doing so let me also do it. The first one is called YOUR OWN NEED and the second one is called HERD MENTALITY. Definitely we invest because we require the saved amount for ourselves at some stage of life to meet any of our requirements. Investment is must for most so as to have some money in hand when required. Now when should one invest ? The answer to this is there is no right or wrong time for investment. Investment should be a continuous exercise. Just as spending is a regular exercise so be investment because somewhere expenses rises and some defined expenses have to be taken care by accumulating wealth through investment over a period of time . There is a famous proverb in hindi “boond boond se ghada bharta hai“ and SIP works exactly on this principal.

SIP or Systematic Investment Plan is something an investor has decided to invest regularly/monthly a small amount in a particular scheme. The basic essence of doing SIP is to slowly, regularly built wealth. Two things are must for a good result from SIP investments no timing of market i.e all time is good for investment and there is no time bar for continuous investment, in other words keep doing investment through SIP till you can afford that long investment horizon. SIP is the best route for wealth creation, wealth accumulation.

Investors should understand two things (1) Notional Return and Real Return (2) Return coming from Lumpsum investment and through SIP.

Notional return is one which is in only in books, which has actually not occurred. You are just calculating on the basis of NAV and you are still invested in the fund, whereas real return is gain or loss incurred when actually exited from an investment. So notional return has no meaning except for academic interest or creating physiological impact. You are neither gaining nor losing because you are still invested. So what matters is the real return which is actual gain or loss when you exit from the fund.

If one has invested a lumpsum then for that investor there are only two reference points for calculating return, the NAV at which he buys and the NAV at which he sells. But in a SIP there are multiple reference points and many yet to come so does it make sense for judging over all return where the game is still on. How can you start getting affected by return by taking few reference points when they are yet to be completed.

But to our dismay we have seen many SIP’s being closed when market went down recently. Reasons for the same are investors were tracking their investment every day and they noticed that their 1 year or 2 year investment showed negative returns. Well if in the first place you decided not to time the market and be in the market for very long period then why suddenly change your mind? In fact if your objective was wealth creation and you were getting equity fund at a lower NAV because market had gone down you should have been happy rather than getting tense.

Now since I had intended to go for long term then why I withdrew when it was most advantageous situation for me. In fact I feel if I have planned to do SIP for say 10 years i.e have to make investment 120 times more I get units at lower NAV it is good because my overall returns will shoot up. But it is very sad that investor generally tends to forget that their last intended time of getting out of the fund is far away and they get influenced by low NAV.

It is a very common error which is committed by most of the investors in recent times that they have discontinued SIP just because return of last 2 years has gone negative. Now just think you withdrew SIP investments when market was in 14000- 15000 sensex level . Now it is above 17000 level so if you had continued investing in SIP you would have gained or not ? Investor should see return from equity investment and particularly from SIP as range of hills with many slopes and heights. If there is a downward slope from the top then there lies further slope which goes upward. It’s all how you look at it. If from top I see I have fallen, going ahead I also see another rise and gain.

The investor which has invested through SIP should have a different mindset than the investor who has invested in lumpsum as in lumpsum there could be either gain or loss but in SIP if we take any two reference points then there will be only gain or loss but if we take many number of two reference points there can be many gains and many loss but in long run it evens out and there is only gain as equity till date has always given positive returns if we take 3 years, 5 years, 7 years, 10 years , 15 years ……… return. Also there has been a clear observation that longer the duration of SIP the higher the returns.

The same can be testified if we look at some of the schemes SIP returns.

Name of the scheme	SIP Amount	No of years	Amount
Franklin India Bluechip Fund - Growth	2000	15	29,28,267
Franklin India Prima Plus - Growth	2000	15	27,51,611
Reliance Vision Fund - Growth	2000	15	28,48,004
Reliance Growth Fund - Growth	1500	15	29,60,830
HDFC Equity Fund - Growth	1500	15	27,25,403
HDFC Top 200 Fund - Growth	1500	15	18,82,757

So I believe my valued investors by now must have understood that SIP is made for you and you are not made for SIP.