Investors are often wait for the right time to start an SIP investment. Fundamentally starting SIP should be independent of existing market levels. It should not matter if the Sensex is at 11,000 or 25,000. Read this space to know why market levels do not matter in SIP?
Can I start an Systematic Investment Plan (SIP) at the current market levels?
The answer undoubtedly, is a big yes!
Fundamentally starting SIP should be independent of existing market levels. Meaning, whether the Sensex is 11,000 or 25,000 it does not matter if you are looking to invest in equity mutual funds via SIP.
But one thing you need to be very sure and certain is that you will not need the money before 5-6 years. Though unlike ULIPs or other life insurance policies, SIP does not have any lock in period, we strongly recommend you maintain the self discipline of staying invested for a minimum of 5-6 years.
So if you are planning for any long term goals that are expected to come only after 5-6 years then this is the right time to start investing in SIP of large cap diversified equity funds.
Why market levels do not matter in SIP?
Anyone who wishes to make money in equities ideally needs to buy more when markets are low and buy less if the markets are high. And unfortunately no one can know what is high or low of a market. That is when SIP comes handy. In SIP you automatically end up buying more units when the markets are low and lesser units when the markets are moving up. This way you proof yourselves from the volatility of the markets.
So if you feel the current markets are in bad shape, then by investing via SIP you end up buying more units. Even if the markets are going to fall further, you end up accumulating more units and thus when markets start recovering you make good returns on your accumulated units.
But again, only if you do not need the money for minimum of 5-6 years this whole thing will work favorably for you.
Does it always work?
Yes, in most cases it should work. Though referring to past performance is not right, but just of this case we assume one was investing Rs 5,000 per month in an SIP in HDFC top 200 from July-2008 to Jun -2013. He would have invested about Rs 3 lacs over a period of 5 years and he would have got Rs 3.67 lacs today. This is an annualized rate of 8% (tax free), and that too when the markets are going through one of the toughest patches.
- Kripananda Chidambaram
(The author is the Director of Fintotal.com)