Start your SIPs today

The right strategy is to start investing in Systematic Investment Plans of mutual funds as soon as you can as it works like a magic in the long term.

Vivek Verma,an HR executive with a multinational company,is a worried man. He has a long term financial goal of buying a bigger house but he is not sure whether to start his mutual fund Systematic Investment Plan SIP now or wait for further correction in the stock market.

Vivek is one of the people who do the classic mistake of timing the market. The clichéd saying do not time the market is rarely followed by most of the investors. Lets analyse this and see whether one should wait for some more correction to happen to start his or her SIPs. Lets start with some basics.

Whats SIP?
Systematic Investment Plan is one of the easiest,popular and best ways to create wealth over longer period of time. SIPs allow a person to invest a fixed amount regularly and take advantage of rupee cost averaging. It reduces the risk of timing the market and stock market fluctuations. Reliance Mutual Fund CEO Sundeep Sikka says,through SIPs the investor is relieved of keeping an eye on the market on daily basis. There is a competent and experienced fund manager who takes care of all the investment decisions.

It Works Like a Magic
If invested for longer period of time say 5-10 year period,SIPs work like a magic for a portfolio. Last few years saw volatility in the markets specially highs of 2008 and lows of 2009. It is during these fluctuations that SIPs reduce risk substantially. The more one delays more he loses on the opportunity of letting money grow for longer period.

Value Research CEO Dhirendra Kumar says that you cannot time the market. SIP is the best route to take advantage of the market fluctuations. A portfolio of 4-5 good equity diversified mutual funds should give a good return if invested for 5 years or more. Ignore the market trends and keep patience. Patience is the key in SIP investing.

Some of the best performing equity diversified mutual funds have given over 20 per cent returns in the last 5 years ,a period which saw much volatility in the stock markets.

Timing the Market
Vivek Vermas fear is right up to the extent where the investment horizon is less than a year. In such short periods,SIPs sometimes work against the portfolio. But SIPs are not meant to be invested for short periods. Mumbai-based Certified Financial Planner,Karthik Jhaveri says,for long term wealth creation and reaching financial goals,one should ignore the stock market trends and start SIP today. Keeping it in the bank would fetch only 3.5 for a year. Waiting for the right time would be a wasteful exercise.

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Let us pull out last 3 years data and check whether it was possible to time the market:

From September 2008,it looked like a downward trend but markets recovered in December 2008. It went down again for next few months only to rise to 14,900 levels in June end. In about a week,markets fell by 1,500 points by July 6,2009. A similar trend of highs and lows continued till markets crossed 21,000 on November 5,2010,but again corrected to 18,684 on January 27,2011.Can you guess from the data what was the right time to enter the markets via SIP route? Dont worry,possibly no one can!

Why Start Now?
With the fall in the market,the NAV of your mutual fund falls. If you have invested through the SIP route,you would be able to acquire more number of units. For example,consider youve started an SIP in a fund in October at the prevailing NAV of Rs 20 for six months. Now,the market goes down for six months and the NAV comes down to Rs 10 in March,the NAV is Rs 20; in April,its Rs 18; in May,its 17,and so on. In that case,you are able to buy more number of units at lower costs. After that,if the market goes up,you can earn better returns. When the market goes up,the NAV follows suit. In the bull run scenario,SIPs may not work well in the short run. However,it is very effective in the long run.

Best Strategy
The right strategy is to start as soon as you can. Equity as an asset class is known to give best returns against any other asset class over longer periods of time. It is difficult to guess when will the stock market will peak. It may well be that stock market goes up to 25,000 levels and bull run continues for another year or so. Would you like to sit on cash till then? That would be a bad strategy.

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Therefore,people like Vivek Verma must start their Systematic Investment Plans as soon as possible. As Association of Mutual Funds of India Chairman,UK Sinha advises,start your SIPs today,as you will never find a correct time to start your SIPs. The more you delay,more it will be difficult for you to reach your goal on time.

So stop trying to time the market and start your SIPs TODAY.

KEY TAKEAWAYS
Invest without worrying about the level of the stock market
Start your SIPs early
Have a financial goal in mind
Invest in equity diversified mutual fund with a proven track record
Do not judge a fund by its short term returns
Spread your investments over 4-5 good funds

ritukant.ojhaexpressindia.com