Don't try to 'time' the markets

Most investors believe they can 'time' the markets, they believe they can enter and exit the markets with a fair degree of accuracy and always know where the markets are headed. The key word here is 'believe.'

While instances of investments being made at low levels followed by a sharp rally are often encountered, it's generally a case of investors getting lucky rather than the decision being based on any insightful study or research.

Recent times bear testimony to the fact that markets can make the best of analysts and experts look like novices. Markets surged from the sub 3,000 levels in May 2003 to the 6,000 levels in a span of a few months. Again its stay at the 6,000 levels was rather short-lived and the markets now find themselves grappling with the 5,000 levels yet again. Can investors claim to have known all of this beforehand?

The solution to this 'timing' problem lies in the systematic investment plan. SIPs allow investors to diversify their investments over various time periods. Instead of handing over a single cheque for a lump sum payment, investors hand out 6/12 cheques (depending on the AMC) of smaller amounts while making the investment.

A common misconception is that making investments using the SIP route entails inconvenience for the investor. Nothing could be further from the truth. In fact, SIPs tend to be lighter on your wallet as investments are made gradually over a period of time.

From the investor's perspective, returns on investments are of paramount importance. So how do investments made through the SIP route fare on this parameter. Let's assume that an investor was to make a lump sum investment and a SIP routed one for a three-year period in a diversified equity fund. The three-year period will ensure that we cover the markets through the bear phase and the bull run as well.

(The data used is factual in nature and has been derived from the fact sheet of a leading mutual fund. SIP returns and three-year lump sum returns have been annualised; one-year lump sum returns are absolute)

While the SIP routed investment comfortably outperforms the lump sum investment over the three-year period, it surprisingly repeats the performance over the one-year period (when the markets rallied sharply) as well. Now let's test if the SIP hypothesis works when a different asset class is being considered say balanced funds.

(The data used is factual in nature and has been derived from the fact sheet of a leading mutual fund. SIP returns and three-year lump sum returns have been annualised; one-year lump sum returns are absolute)

Barring Fund P, where the SIP (75.09 per cent) routed one-year performance is outscored by a lump sum investment (82.52 per cent); SIPs continue to be the winners.

So what makes SIPs so lucrative? The answer lies in rupee cost averaging; spreading your investments over various time horizons enhances the probability of lowering your total cost which in turn translates into better returns.

Systematic investment plans not only spare investors the effort of 'timing' the markets but can also offer better returns vis-à-vis a lump sum investment. Ignoring them can prove to be a costly miss.

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