Over the last few years, SIP investments have ballooned as people from all walks and corners have started to invest through SIPs. From Rs 3122 crore worth of SIPs in mutual funds in April 2016, the fund industry has witnessed an inflow of Rs 6,690 crore SIPs in April 2018.
But as systematic investment plans are a strategy or a way to invest in the market, investors must keep in mind that SIP is not a get rich quick ticket or a short-term tool.
Here’s why.
IT’S JUST AN INVESTING STRATEGY
SIPs essentially break down your investments into equities or any underlying asset such as debt into more manageable monthly or regular investments. So one big issue with such an investment strategy is that you don’t get to ‘time’ the market with SIPs.
Once you start a SIP, you don’t get to choose when you will ‘invest’ in the market. Systematic investment plans are only made on pre-specified dates which is usually 1st, 7th, 14th or 21st or 28th or any other dates as a fund house specifies.
So unless the market falls specifically on those days when your SIP installment is deployed in the market, you are not technically ‘buying the dips.’ Remember, one of the first rules of investing correctly in equity markets is to ‘buy low’ and ‘sell high’.
SIP’S MAY NOT ALWAYS BUY THE DIPS
Consider a lump sum investment, on the other hand. Here you can wait for the broader equity market to, say, fall 10-15 percent, and bam, deploy your lumpsum investment. It helps you to attempt to time the market and bag stocks at lower prices.
For a SIP investment model to work right for you all the time whether short-term or long-term, the market has to be in a constant steady state rise like in a straight upward sloping.
We all know this is impossible. Markets are constantly fluctuating and moving up and down.
So if you have a short-term goal, SIPs are not the way to go about your investments. If the markets happen to fall after six months or one year of regular SIP investments, you mind find your SIP returns in the red.
SIPs are not the investment. It’s just a strategy to invest in mutual funds. Most new investors these days are mistaking SIP to be an investment in equities.
SIPS AVERAGE BUYING PRICES
And like all strategies, a perfect SIP model has to be able to get you the most units at the lowest possible price. But there are many days in which the SIP may be exercised at the high point of that month because markets are in a constant state of flux.
So in reality with a SIP you are just ‘averaging’ the buying price.
And like all averaging plans, you will never get returns in the short run unless, of course, you are lucky and the market is continuously rising in the short-run.
If you spend a lot of ‘time’ in the market and invest continuously through a SIP for at least three to five years, there’s a much better chance that you will be able to reflect the compounding power equities and the power of averaging through your SIP returns.
