Let me start by sharing what a prominent investment portal has to say about the benefits of opting for a Systematic Investment Plan (SIP).
“Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. This SIP Calculator will show you how small investments made at regular intervals can yield much better returns over a long period of time.”
I recommend treading with caution while relying on such supposed advice.
Systematic Investment Plans are a key part of the efforts made by fund houses to attract investors towards equity funds. A number of financial advisors and investment portals also encourage investments through SIPs. However, as I see it, a lot of the stuff out there necessitates reading between the lines, and filtering fact from fiction. The quote at the start of this post is just one example of this. Opting for a SIP can, indeed, be beneficial, but not in the way that this portal would have us believe.
For those of us who rely on the regular income from our profession to build wealth, a SIP is a convenient and effective way to invest regularly. In an earlier post, I had mentioned that the wealth that we build is influenced by the amount that we save, the timeliness of our investments and the quality of our investment choices. In my previous post, I had built on this to make a case for saving more and investing regularly. This is a useful framework to understand the importance of a SIP. It is a means to channelize, in a timely fashion, the amount we choose to save, into the funds that we choose.
In other words, we are responsible for our investment choices and the amount that we invest; a SIP has no role to play in that. Furthermore, merely opting for a SIP cannot compensate for poor investment choices, or for a lack of thrift. It is up to us to decide how much to save and how to allocate this between equity funds and debt funds. A SIP ensures that we will not delay investing and will, thus, use time to our advantage. Therein lies its importance.
SIPs can also be beneficial for those of us in a dilemma when deciding to invest a large sum of money into equity funds (or anything that is susceptible to frequent, steep price fluctuations). Such dilemmas exist because of the uncertainty attached to the price- Is the current price a good price to invest at? Or is it better to wait for the price to fall? In effect, we have three choices:
- Invest this at one go, now
- Invest this at one go, on a later date
- Invest this in smaller tranches, over a period of time
There is no basis for anyone to say for sure, as to which of these choices will result in the best returns. We will only know in hindsight which course of action would have been the best. Some of us may be inclined to take a call on the price movement and, hence, go with the first or the second option. Those of us who would like to hedge out bets would opt for the third choice. A SIP (or a Systematic Transfer Plan) is a convenient way to exercise this third choice. It may or may not yield better returns as compared to the first two choices, but in all likelihood, it will enable us to sleep more peacefully.
