Systematic investment plans (SIPs) have become a popular mode of investing in mutual funds. They enable investors to ride out fluctuations in the market by purchasing units at regular intervals. An SIP investor gains in all market conditions. If the market goes down, he benefits because he gets to buy at low prices. If the market goes up, he still benefits because the value of his past investments rises. This systematic investing averages out the buying cost of units over time. SIPs promote disciplined and regular investments and are particularly useful for risk-averse investors.
Though SIPs average out the cost for an investor during a volatile phase, they tend to underperform if there is a lump-sum investment in a consistently rising market. That’s because the lump-sum investment was made when the market was low and the SIP investment was done over a period during which stock prices—and therefore the NAV of the funds—was rising. But this comparison assumes that the investor had bulk money to invest at the beginning of the bullish phase. Not many people can commit large sums at one go, which is one reason they choose the SIP route.
We compared the SIP and lump-sum investments in both volatile and bear markets to see how they fared. The market conditions are hypothetically created for a period of 19 months. The period is illustrative and does not reflect the real markets.
SIP in a Volatile Market
In November 2005, two investors Lalit and Sanjay planned to invest in a fund. Lalit invested Rs 95,000, while Sanjay started with Rs 5,000 in an SIP in the same fund. At the time of entry, the NAV of the fund was Rs 16. Over the next 19 months, the markets witnessed a lot of volatility and the fund’s NAV grew by about 43.75% to Rs 23 in May 2007. That’s when both decided to exit. Investing systematically, Sanjay acquired 206.5 more units than Lalit. He earned a return of 48.75% as opposed to 43.75% earned by Lalit. Clearly, the SIP mode was more beneficial in this case.
| Lump sum (Lalit) | SIP (Sanjay) | • After 19 months, SIP investor has Rs 4,750 more than lump-sum investor • He benefits from volatility, gets 206.52 extra units | |
| Amount invested | Rs 95,000 | Rs 95,000 | |
| Entry NAV | 16 | 16 | |
| Exit NAV | 23 | 23 | |
| Buying cost per unit (Rupee cost averaging) | 16 | 15.46 | |
| Units acquired | 5,937.50 | 6,144 | |
| Value of investment | Rs 1,36,563 | Rs 1,41,312 | |
| Return earned | 43.75% | 48.75% | |
| Assuming no entry-exit loads | |||
SIP in a Bear Market
SIPs also score in bearish markets. In September 2006, Deepak invested Rs 95,000 as lump sum in a fund, whereas Vijay started with Rs 5,000 in an SIP. The NAV was Rs 17. Over the next 19 months, the markets went into a downturn and the fund’s NAV fell by about 32.37% to Rs 11.5. Both investors exited in March 2008. Though both investors lost money, Vijay’s loss was less than Deepak’s by Rs 15,087. His average cost of a unit was Rs 13.77 compared with Deepak’s purchase price of Rs 17. Here, too, the SIP mode worked out to be more profitable for the investor.
| Lump sum (Deepak) | SIP (Vijay) | • SIP investor reduces loss by spreading investments over time • Lump-sum investor loses Rs 15,087 more than SIP investor | |
| Amount invested | Rs 95,000 | Rs 95,000 | |
| Entry NAV | 17 | 17 | |
| Exit NAV | 11.5 | 11.5 | |
| Buying cost per unit (Rupee cost averaging) | 17 | 13.77 | |
| Units acquired | 5,588.24 | 6,900.5 | |
| Value of investment | 64,252.7 | 79,340.5 | |
| Return earned | -32.37% | -16.48% | |
| Assuming no entry-exit loads | |||
No comments:
Post a Comment