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5 reasons for investing systematically

August 19, 2004 14:00 IST

Over the last 12 months investors in equity markets have seen it all. From all time highs of 6,200 levels to dismal lows of 4,200. A lot of investors who entered at 6,200 expecting the market to go even higher are very upset. Most investors cannot really stomach the kind of volatility that is inherent in equity markets. At the end of the day, investors who can take some risk are actually shunning equities only because they entered equity markets at the 'wrong time'. Systematic investment plans take care of this problem. But market timing is not the only reason for you to plump for SIPs, there are other advantages.

1. Light on the wallet
Given that average per capital income of an Indian is approximately only Rs 25,000 (i.e. monthly income of Rs 2,083), a Rs 5,000 one-time entry in a mutual fund is still asking for a lot (2.4 times the monthly income!). And mutual funds were never meant to be elitist; far from it, the retail investor is as much a part of the mutual fund target audience as the next high networth investor. So if you cannot shell out Rs 5,000, that's not a huge stumbling block, take the SIP route and trigger your mutual fund investment with as low as Rs 500 (in most cases).

2. Makes market timing irrelevant

If market lows give you the jitters and make you wish you had never invested in equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition.

Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? Its because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record.

3. Helps you build for the future

Most of us have needs that involve significant amounts of money, like child's education, daughter's marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But if you start saving a small amount every month/quarter through SIPs that is treated as sacred and that is set aside for some purpose, you have a far better chance of making that down payment on your house or getting your daughter married without drawing on your PF (provident fund).

4. Compounds returns

The early bird gets the worm is not just a part of the jungle folklore. Even the 'early' investor gets a lion's share of the investment booty vis-à-vis the investor who comes in later. This is mainly due to a thumb rule of finance called 'compounding'.

According to a study by Principal Mutual Fund if Investor Early and Investor Late begin investing Rs 1,000 monthly in a balanced fund (50:50 – equity:debt) at 25 years and 30 years of age respectively, Investor Early will build a corpus of Rs 80 lakhs (Rs 8 million) at 60 years, which is twice the corpus of Rs 40 lakh (Rs 4 million) that Investor Late will accumulate. A gap of only 5 years results in a doubling of the investment corpus! That is why SIPs should become an investment habit. SIPs run over a period of time (decided by you) and help you avail of compounding.

5. Lowers the average cost

SIPs work better as opposed to one-time investing. This is because of rupee-cost averaging. Under rupee-cost averaging an investor typically buys more of a mutual fund unit when prices are low. On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors may even be pleased when prices fall because the fixed rupee investment would now fetch more units.

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