SIPs - A disciplined approach to wealth creation

All market-linked investments go through ups and downs. To create wealth over the long run, a disciplined, far-sighted approach is critical and wins over a short-term one. For those investing in mutual funds, Systematic Investment Plans (SIPs) offer to create long term wealth. SIPs offer a simple and disciplined way to generate higher risk adjusted returns and meet the desired goals. The concept is similar to recurring bank deposits wherein investors contribute a fixed sum of money at regular intervals.

How do SIPs help?

They make market timing irrelevant:

SIP's biggest advantage is that it negates the need to time the market. In timing the market, one can miss the larger rally; one may stay out in a bull run or may enter in the bear phase as one can never accurately predict how the market may behave in future. Investing at regular intervals ensures that one is invested both at the high and the low points of the market, and make the best of an opportunity that is otherwise difficult to predict.

For example, a monthly SIP of Rs 1,000 for a three-year period ended December 31, 2010 in a CRISIL Consistent Fund Rank 1 Equity Scheme would have grown to Rs 61,790 at an annualised rate of 38%. On the other hand, Rs 36,000 invested as a lump sum in that scheme on January 1, 2008 (near the market peak) would have returned Rs 48,106 as on December 31, 2010.

Rupee cost averaging:

SIPs make the market volatility work in favour of an investor and help in averaging out the cost