ast year, July 2004 to be precise, I decided to take the plunge and invest in mutual funds.
All along, I had invested mainly in fixed return instruments. I felt it was time to opt for some more risk.
My banker told me that some of the diversified equity funds (mutual funds that invest in different companies of various sectors) had managed to deliver great returns.
And, like most advisors, he suggested that I invest via a Systematic Investment Plan.
Where an SIP scores
I have heard various proponents tout the other benefits of investing in a mutual fund via an SIP.
It is high on convenience.
All you have to do is give your bank a standing order to debit a fixed sum every month to the mutual fund house. And, that money is invested in the mutual fund of your choice.
Depending on the Net Asset Value (price of the unit of a fund), you will get units allocated to your name.
Also, this cultivates a savings habit. What does not come into your hands, you don't spend.
What's more, you avoid trying to time the highs and lows of the market and though you continue to invest even when the markets are very volatile, it evens out over time.
My portfolio
After being thoroughly convinced on what a great investment option this was, I shortlisted three of the top performing funds: Franklin Prima, HDFC Top 200 and Franklin Bluechip.
I decided to invest Rs 2,000 in each of them every month.
|
|
NAVs on the day I purchased them | ||
|
Month |
Franklin Prima |
HDFC Top 200 |
Franklin Bluechip |
|
Aug 2004 |
78.95 |
38.84 |
49.98 |
|
Sep |
80.92 |
40.019 |
50.92 |
|
Oct |
95.79 |
43.9192 |
57.08 |
|
Nov |
99.84 |
44.3959 |
59.68 |
|
Dec |
107.19 |
48.2097 |
61.25 |
|
Jan 2005 |
115.26 |
50.3940 |
62.27 |
|
Feb |
118.997 |
51.3857 |
62.28 |
|
Mar |
116.10 |
53.220 |
64.36 |
|
Apr |
122.54 |
54.0010 |
66.81 |
|
May |
126.530 |
54.9730 |
64.68 |
The time factor
From the above it can also been seen that rupee cost advantage is not true always with the SIP. As a lump sum invested on August 2004 could have given a better returns.
If I had invested a lump sum in all three of the above schemes on August 2004, I would have got much better returns. My returns would be around 56.5% in Franklin Prima, 50.3% in HDFC Top 200 and 33.7% in Franklin Bluechip.
Instead, my returns through SIP till May 2005 (if I average it out over time), stands at 31.2%, 15.2% and 23.4% respectively.
Despite what everyone says, it is not always wrong to time the market.
If I had invested during the time the markets slumped, say during January 2005, March 2005 or April 2005, I might have made more.
But, in an SIP, a fixed sum is invested on a specific date on each of the above months. If the NAV were higher on those days, you lose out on this advantage (because higher the NAV, the fewer the units you end up with).
The cost factor
Also, investors do need to take note that though there is no entry load on SIP, there is an exit load if you redeem (sell) you units within a fixed time frame.
An entry or exit load is a fee that is charged when you buy or sell the units of a mutual fund.
Depending on the fund, the time frame specified could be one or two years.
And this time frame starts not from the very first SIP but depends on each monthly investment.
Let's say the mutual fund gives you a lock-in period of one year. If you sell your units within a year of acquiring them, you pay an exit load.
So the investment you make in January 1, 2004, will be exempt from an exit load if you sell it on or after January 1, 2005. Similarly, for February 1, 2004, the time period will be till February 1, 2005.
The type of market
An SIP does not work in a bull market.
In as bull market, like the one we have now, when share prices keep rising, an SIP is not the best investment route.
In a rising market, then every subsequent SIP will be valued at a higher NAV and the average returns would tend to drop at every SIP.
In other words, you end up buying units at a higher rate.
So while your investment amount is fixed, the number of units you get keeps decreasing.
Your call
I have no intention of trying to prove that an SIP is a failure. Nor am I attempting to discourage potential SIP investors.
All I am saying is that there is no one surefire method of investing. Each has its own pros and cons.
You, as an investor, must weigh all possibilities when investing your money.
An SIP will work if you have a long time frame.
If you do not need your money in a hurry and are willing to ride the bear and bull phases of the market, then you should consider it.
I, for one, will continue with my SIP for it does have its advantages and one that is significant for me is that it cultivates a regular savings habit.
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