Market Outlook - Long Term

SIPs: A long-term investment strategy

Posted by : sp.palo

Some investors opt for SIPs thinking that despite the drawbacks it is nonetheless a smart way to invest as opposed to one-time lumpsum investments. This is right, but SIPs work best only if you last the entire tenure and don’t redeem units prematurely. Some investment consultants advise their clients to go in for SIPs because the entry load is waived off. Their argument is that since the entry load is waived off, then even if the client withdraws prematurely, the 2.00% exit load (approximately) is not really damaging as its just a charge for not paying the entry load. This argument is flawed because the entry and exit loads are charged on different amounts.

For example, from the above real life illustration its easy to understand how the exit load can be particularly high on premature redemptions from an SIP. Take the first SIP at an NAV of Rs 11.72 (in the table above); if the investor had entered one-time at that level at 2.00% entry load it would have cost him Rs 0.23 (2% of Rs 11.72). But since he has opted for the SIP route let us understand how a premature redemption works for him. Say, the investor wants to redeem his units by January 1, 2005 because the NAV has climbed significantly and he wants to capitalise on the opportunity. He will be slapped with a 2.00% exit load since the entry load was waived off on the SIP. However, the 2.00% exit load will be calculated on Rs 18.68, which amounts to Rs 0.37. Compare this with the Rs 0.23 he would have had to pay if he had entered lumpsum in August 2004.

SIPs: A long-term investment strategy

Posted by : sp.palo

I may not be correct in my view .
But.. Suppose we invest in SIP for 3 years. Say the first 18 months markets rise 25% and the next 18 months the markets fall 30%, then what about the invested money. Someone may say that 4-5 years should be the horizon. Where is the end ?

My point is neither there is guarantee about the returns after a specific period nor we can specify a time frame as a safe horizon.So,book profits or redeem your funds after a predefined gain. Thats it. Greed has no end.

SIPs: A long-term investment strategy

Posted by : sp.palo

Some investors opt for SIPs thinking that despite the drawbacks it is nonetheless a smart way to invest as opposed to one-time lumpsum investments. This is right, but SIPs work best only if you last the entire tenure and don’t redeem units prematurely. Some investment consultants advise their clients to go in for SIPs because the entry load is waived off. Their argument is that since the entry load is waived off, then even if the client withdraws prematurely, the 2.00% exit load (approximately) is not really damaging as its just a charge for not paying the entry load. This argument is flawed because the entry and exit loads are charged on different amounts.

For example, from the above real life illustration its easy to understand how the exit load can be particularly high on premature redemptions from an SIP. Take the first SIP at an NAV of Rs 11.72 (in the table above); if the investor had entered one-time at that level at 2.00% entry load it would have cost him Rs 0.23 (2% of Rs 11.72). But since he has opted for the SIP route let us understand how a premature redemption works for him. Say, the investor wants to redeem his units by January 1, 2005 because the NAV has climbed significantly and he wants to capitalise on the opportunity. He will be slapped with a 2.00% exit load since the entry load was waived off on the SIP. However, the 2.00% exit load will be calculated on Rs 18.68, which amounts to Rs 0.37. Compare this with the Rs 0.23 he would have had to pay if he had entered lumpsum in August 2004.

SIPs: A long-term investment strategy

Posted by : gv

Hi Bhavani,
Yes that is the point,i buy when the price is low relatively
Take care
Gv

SIPs: A long-term investment strategy

Posted by : ank1977

Market has given a serious message since january 2008, that one should fix his return, investment period. One should book his profit partial at regular interval, otherwise v can c the situation from january to till date. Almost every scripts either it is a large cap, midcap or small cap, fallen down almost 40-50%. Most of us have invested at the level, where actually one should exit and wait for the correction. Of course, the tempo at that time was amazing, everyone was thinking about 23000-25000 level, nobody was in the mood of book his profit. About SIP, it is best tool in any market, either it is a rising market or it is a falling market, end of the day ur average will come down automatically, if u r a disciplined investor thru SIP. Make it for at least 5 to 10 yrs, in between if u r making handsome profit, book some of that and continue with SIP.

SIPs: A long-term investment strategy

Posted by : jstocks

you have put a valid point here, I feel that SIP investments should be for a very long time frame. I would personally like to continue for abt 20 to 25 years, only then one can see the power of compounding

SIPs: A long-term investment strategy

Posted by : sp.palo

I may not be correct in my view .
But.. Suppose we invest in SIP for 3 years. Say the first 18 months markets rise 25% and the next 18 months the markets fall 30%, then what about the invested money. Someone may say that 4-5 years should be the horizon. Where is the end ?

My point is neither there is guarantee about the returns after a specific period nor we can specify a time frame as a safe horizon.So,book profits or redeem your funds after a predefined gain. Thats it. Greed has no end.

SIPs: A long-term investment strategy

Posted by : Bhavani27

GV Uncle:
Isn\\`t an SIP of 1,000 INR due fifth of every month like a prior commitment to my grocer that whatever be the price I will buy Rs 1,000/- worth of rice on the fifth of every month. If this seems a ridiculous way of running the home why does everybody fall head over heels on the SIP schemes as they now exist. It would make more sense if my periodic investment was that I would buy 1,000 INR worth of rice whenever the price is between say 18 and 20 INR.

SAVAM KRISHNAARPANAM
Bhavani

SIPs: A long-term investment strategy

Posted by : gv

Hi braintalks,
Good post
But there are other considerations one can think of
It can be a raising market or a falling market
Why i should commit long term with the fund manager?
The reason,i know what is the fund i can allocate for sip
So if i do online investments when the index falls in installments
i can choose the timing on the other case i have no control only the fund manager has
Also why i should bank on one scheme?it may do well or may not
So why commit for long term?
Instead i can do online,the sachems i like depending on market condition
and Switch my predetermined funds to the schemes i like or do well
Earlier times online was not available and SIP was preferred

SIP is advantageous to the fund houses because they can know how much funds that are coming in and at what time
Moral of the story "they want to control their destiny"
Regds
GV

SIPs: A long-term investment strategy

Posted by : sp.palo

I may not be correct in my view .
But.. Suppose we invest in SIP for 3 years. Say the first 18 months markets rise 25% and the next 18 months the markets fall 30%, then what about the invested money. Someone may say that 4-5 years should be the horizon. Where is the end ?

My point is neither there is guarantee about the returns after a specific period nor we can specify a time frame as a safe horizon.So,book profits or redeem your funds after a predefined gain. Thats it. Greed has no end.

SIPs: A long-term investment strategy

Posted by : braintalks

Systematic Investment Plans are much misunderstood. For one, investors often mistake SIPs as an investment avenue rather than a mode of investing in mutual funds. Then there are investors who invest in SIPs expecting quick results without fully appreciating the need to invest via SIPs for the long-term.
In an earlier article, we discussed how SIPs are perceived incorrectly by many investors as standalone investments. This explains why one of the most common queries we receive on the website is - which is the best SIP? Unfortunately, these investors have not been educated by their investment advisors about SIPs i.e. SIPs are only a mode of investing and not an independent investment avenue.

Which is the best SIP?
Minimum tenure of an SIP
Another misconception investors have about SIPs is with regards to the minimum tenure. Most fund houses have a minimum SIP tenure of 6 months. This leads investors to believe that 6 months is the ideal time frame for investing via SIPs (just like a lot of investors invest Rs 5,000 in mutual funds simply because that is the minimum investment amount for several mutual fund schemes).

In our view, investors should ideally invest via SIPs over at least 2-3 years. This way they can exploit the most critical benefit of an SIP - rupee cost averaging. Let's understand how this is possible.

For an SIP to deliver the goods, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, i.e. he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time.


SIPs in a rising market
Month of investment NAV (Rs) No. of Units
January 11.00 45.45
February 12.00 41.67
March 12.50 40.00
April 12.90 38.76
May 13.25 37.74
June 13.40 37.31
Avg. purchase cost of 6 SIPs Rs 12.45

(The example is for illustrative purpose only.
We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs 500.)
In the above table the average purchase cost of the SIP is Rs 12.45. Clearly, the SIP has not worked in the investor's favour. Why is that? Because if he had instead invested lumpsum in January, his purchase cost would have been Rs 11.00 as opposed to the average purchase cost of Rs 12.45 over a 6-month period.


SIPs in a falling market

Month of investment NAV (Rs) No. of units
January 11.00 45.45
February 12.00 41.67
March 12.50 40.00
April 12.90 38.76
May 13.25 37.74
June 13.40 37.31
July 12.10 41.32
August 11.20 44.64
September 10.30 48.54
October 10.10 49.50
November 10.50 47.62
December 10.20 49.02
Avg. purchase cost of 12 SIPs Rs 11.50

(The example is for illustrative purpose only.
We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs 500.)
However, if the investor had opted for a longer investment tenure of say 12 months, he could have benefited from greater fluctuations in the mutual fund's NAV. These fluctuations which arise over a market cycle lower the average purchase cost of the SIP over the long-term.

This is apparent from the above illustration. As is evident from the table, if the investor had taken an SIP for 12 months (instead of 6 months) his average purchase cost would have declined to Rs 11.50. Compare this with the average purchase cost of Rs 12.45 for a 6-month SIP.

It can be argued that there is no way for the investor to know when there is likely to be a turnaround in the markets (in this case a downturn). That is exactly our point. Since the investor does not know when markets will fall (and lower his average purchase cost), he must opt for a longer SIP tenure. Or at least he must manage his investments in a manner so that when his existing SIP terminates without witnessing a dip in stock markets, he can extend it further. This way should the markets fall, his SIP can benefit from a dip in the mutual fund NAV which in turn will lower his average purchase cost.

Points to remember before opting for an SIP


1) Ironically, while SIPs are meant to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to 'time' the market downturn.

2) SIPs are equally beneficial in a falling market. Most investors believe that lumpsum investments (as opposed to SIPs) prove more beneficial in a falling market. This is only partly true. Having an SIP in operation during a falling market can ensure that investors stand to benefit should markets fall even further.

Source: rediff