SIP it slow, if you want it to grow

SIP it slow, if you want it to grow

DNA

SIPs allow one to buy at every level in the market; one buys more in a falling market and less when the markets are rising

MUMBAI: Systematic investments plans (SIPs) of mutual funds are slowly becoming popular. And with good reason. Going by the advertisements brought out by mutual funds detailing their many virtues, they may well be the best thing to have happened to mankind since the invention of the wheel. Jokes apart, investing through SIP does work.
Reliance Growth has been the top performing scheme in the last ten years. If an investor had invested Rs 2000 every month, from October 1996 till now, over a ten year period, his total investment of Rs 2.40 lakh (Rs 2000 per month, amounts to Rs 24,000 per year, and Rs 2.4 lakh over ten years) would have grown to more than Rs 22.1 lakh by now. This with the assumption that he had invested in the growth option of the scheme.
But back then, the investor had to know that Reliance Growth as a scheme would be the best performing scheme, in the next ten years. This he obviously would not know given that the scheme was launched only in December 1995 and had very little track record. Also those were the days when US-64 used to rule the roost and every middle class Indian had it as an essential part of his or her investments.
Let's say an investor wants to start investing through an SIP now, he does not face the same problems, like his contemporary did ten years back. Right now, like other things in life, there is no dearth of mutual funds to choose from. On the last count there were more than 160 funds to choose from in the diversified equity category. Also some of the mutual funds have been in the market for a period of five to ten years now. Hence there is enough data to separate the men from the boys.
The first thing to take a look at when deciding to invest through the SIP route is to take a look at the long term performance of the scheme, preferably over a 5 to 10 year period.
If a fund has performed well over this period what it tells us is that the fund has been through various stages of the market and has survived them. Hence the chances of such a fund performing well over the coming years are better vis a vis fund which was launched only in the last few years of the bull run.
As of now most fund houses charge the same entry load on bulk investments as well as SIP investments. This typically tends to be 2.25% of the amount invested. But there are fund houses which charge an entry load of 1% or even 0% on investments through SIP.
This is used as a selling point by mutual fund distributors. But an investor should not invest in a fund through the SIP route just because it charges a lower entry load. The long term returns of the fund should be the primary criteria on whether to invest in a particular fund.
It is very important to continue with the SIP when the markets are falling. When the markets are falling, its a good time to buy. But when prices are falling, its psychologically difficult to buy. On the other hand, when the markets peak, a lot of investors enter the market.
An SIP ensures that you buy more when the markets are falling and less when its peaking. But if an investor backs out when the markets are falling he won't be buying when the markets are falling and this will not him to average his price, the primary reason behind the success of investing through the SIP route.

To know how to get started with sip write to mutualfund_help@yahoo.com.