Drink Stocks SIP By SIP

How much can a regular investment of Rs 5,000 per month in an equity mutual fund become over a period of five years? If you had invested Rs 5,000 monthly in the SBI Magnum Contra Fund, you would be sitting on Rs 14.81 lakh now. A return of 69 per cent per year.

Yes, Rs 3 lakh (Rs 5,000 x 60 months) that you invest over a period of 5 years would have amounted to almost Rs 15 lakh by now. Nearly five times the money, in five years. That's the power of investing in a mutual fund through the systematic investment plan (SIP) route.

Naysayers will say a one-time investment would have worked better. Yes, it would have. A one-time investment of Rs 3 lakh into the SBI Magnum Contra Fund on November 2, 2002, would have grown to Rs 42.55 lakh by now. However, back then in 2002, how many people really knew that the Indian stock market would perform the way it has. In addition, it is easier to keep investing Rs 5,000 every month, rather than invest Rs3 lakh at one go.

SBI Magnum Contra Fund is now a top performing scheme. But back in 2002, an investor wouldn't have known that this scheme would turn out to be a leader of the pack. The question is whether regular investing works only for the best performing schemes. The answer is no.

Let us say an investor had put Rs5,000 every month for the last five years in DBS Chola Opportunities Fund, which has been the worst performing equity fund in the Indian stock market over the last five years. The total investment of Rs3 lakh over a period of 5 years would currently be valued at Rs8.89 lakh. The performance is not as good as the SBI Magnum Contra Fund, but it's not too bad either.

What is it that makes SIPs a good way of investing? "Three big things: averaging, convenience, and discipline" says Akhilesh Tilotia, Director, PARK Financial Advisors Private Limited. "Due to the SIP amounts being debited through the electronic clearing system (ECS), convenience is a major factor: the investor is not troubled every time he wants to invest. Again, SIP enforces discipline of savings and takes away the habit of trying to time the market," he adds.

"SIPs bring in fiscal discipline to one's finances. A specified amount is committed, so the expenses are met with whatever is available after that. It's a forced saving. Also, some investors tend to think that SIP investments can't be taken out while the investments are going on, and hence do not touch it. This helps them accumulate a decent corpus," says Suresh Sadagopan, certified financial planner who runs Ladder 7 Financial Advisories.

As Tilotia points out, one big advantage of SIPs is the fact that it brings rupee cost averaging into play. When markets are doing well, the price of a single unit of a mutual fund goes up. In an SIP, an investor invests an equal amount every month, and when the price goes up, he ends up buying a lesser units. Vice versa, when the stock market is not doing well: the price of a single mutual fund unit falls and hence the investor ends up buying more.

This ensures that investors limit their purchases when the markets are doing well and buy more when the markets are not doing well, thus following the quintessential principle of buying more when the markets are low. Left on their own, most individual investors decide to enter the markets only when the markets are doing well and hence go against the principle. "It is easier for people to go with the flow, better to be wrong with the herd, rather than be wrong alone," says Tilotia. "It is easy to feel confident about the market when it is going up as you feel others are buying and I might miss the boat. The same logic works when the market falls. I need to exit the boat before it rocks. It's nothing but emotions such as fear and greed that play a role in an investor's life," says Amar Pandit, financial planner who runs My Financial Advisor.

Other than this, there is a set of investors who try to time the market on the basis of where it is headed. Investors who buy into this theory spend a lot more time trying to figure out which way the market is going. Because they get it right a few times, they assume they'll keep getting it right. "You might get the timing right sometimes, but not always, and you will miss the bus at some point. It might work once or twice, giving you false precision, but I'm yet to meet somebody who has done this consistently," says Pandit.

"The fact is that timing the markets is easier said than done," says Sadagopan. And those who try to time the markets may miss out on stock market rallies. "How many people have really participated in the rally from 14000 to 19000?" asks Pandit. "I think very few, because more money is lost waiting for corrections than in corrections themselves." The SIP route ensures that an investor doesn't try to time the market, and keeps investing.