Home > Business > Personal Finance

Piggybanking to profit, the SIP way

Shobhana Subramanian in Mumbai | July 20, 2004 09:43 IST

Have you been fascinated by stocks and always wanted to punt but felt you didn't have enough? Contrary to what you may think, you do not need to have a huge sum of money to spare. You can actually be an investor in a mutual fund with as little as Rs 500 a month.

Invest in mutual funds through a systematic investment plan. Today, the minimum initial investment in mutual funds through SIPs is as low as Rs 1,000. SIPs can thus give you a chance at playing the markets, without putting too much of strain on your bank balance.

Money apart, timing the market is not the easiest of things. Even experts can't claim to have always got it right. Besides, even if you feel it is the right time to invest, you may not have the money with you right then.

In volatile markets, SIPs are also a means of being able to optimise your cost price. Since the units are bought every month (most funds offer a choice of two to three days), the number of units that one buys depends on the net asset value of the scheme on that day.

Thus, one gets more units for the same amount of money if the markets and consequently NAVs are down. The reverse would be true if NAVs are up. Thus, over a period of time, the investor is, in more cases than not, able to even out his cost price.

SIPs also inculcate a sense of discipline in investors. Normally, investor psychology is such that one tends to buy into stocks only when the markets are moving up and valuations are far from reasonable rather than when the markets are weak and valuations look much more attractive.

The herd mentality, more often than not, can often work to one's disadvantage though it takes enormous courage to actually take the plunge when the markets are falling.

However, in a SIP since purchases are made even during downturns, when prices have fallen, the returns can often turn out to be much better. If one wants, one can invest in schemes of different funds, track the performance and opt out if one is dissatisfied. Even within limited amounts, you could hedge your options.

Essentially, once you have picked your scheme, all you need to do is deposit your cheques, one dated now and the remaining post-dated, monthly or quarterly or even half-yearly. Your cheques could either be all of the same denomination, say Rs 2500 or the initial cheque can be of a larger denomination with the others being equal.

The good news is that most funds do not charge an entry load for investing through SIPs. However, they do charge an exit load if you redeem your units before a specified period, say a year and this back-ended load could be between 1.75 per cent and 2 per cent.

Funds are also trying to make it more convenient for investors to invest through this route. For example, very soon you may be able to access SIPs through your office. Funds are tying up with corporates so that monthly amounts can be deducted from the salary of the individual.

This eliminates the need for post-dated cheques. It is also possible to move from equity funds to say a debt fund if one feels that opportunities in that segment of the market could be better for a certain period of time.

This can be done through a systematic transfer plan, where the amounts would be transferred to the scheme of your choice. While equity is risk and ultimately, your return will depend on the performance of the fund, experts point out that it's time in the market and not timing the market that matters.

Powered by

Article Tools
Email this article
Top emailed links
Print this article
Write us a letter
Discuss this article

Related Stories

MFs: The 6-month scorecard

MFs: The 6-month score card

Fund of Funds = Cost of costs

Copyright © 2004 rediff.com India Limited. All Rights Reserved.