Skip to main content

SIP is not a speculative investment plan

Best SIP Funds Online 


At a recent investor meeting, as the mutual fund representative was displaying the fantastic returns his funds had generated, an investor got up and said that his returns are lower than the returns on the presentation slide. The rep tried to assuage him by talking about the timing of investment, how returns will align over a longer period of time; but obviously could not convince him. To corroborate the investor's point, a recent study shows that investors' folio returns were almost 5-6% lower than fund returns over a full market cycle—or a period of about 10 years. Why is that so? Apart from factors like loads (not there any more), the most important reason is timing of entry and exit. Investor behaviour is aligned towards starting equity investments when markets are touching new highs and exits when markets are touching lows. Even for individual portfolios, equity allocations rise when markets are high and decrease when they are low.

To avoid this behaviour, a bright solution was SIP (systematic investment plan), where you invest a fixed amount periodically. The idea behind an SIP is regular investment and avoiding market timing. This smoothens volatility over longer periods of time. Technically, what the SIP does is help you lower your average cost in a falling market. But in a rising market you are buying lesser quantity for the same investment and thus the average cost goes up. Hence, the SIP performance measurement takes into account that investment is made at many points in time. On the other hand, fund returns are measured assuming you invested at one particular point in time and exit in another. This is why there is going to be a disconnect when SIP returns are measured against fund returns. Particularly in a growth market, which is on a long-term rising trend, single-point return is likely to be elevated because an SIP continues to invest as the market rises.

SIPs are hugely successful tools for enforcing savings discipline and should probably be called 'systematic savings plan'. For first-time investors and those with low exposure to mutual funds or stocks, they are a simple and convenient tool. However, to extract maximum returns out of SIPs, it is critical not to exit in falling markets and if possible even enhance the amounts. If history is anything to go by, a large number of current SIP investors are likely to stop or reduce their SIPs when markets fall, which is counter-productive. This investment behaviour ensures that their cost will remain high and returns will be significantly lower than fund returns.

Let's assume that Indian equity markets will give 13-15% returns over a long period of time—in line with historic returns too. However, if in the recent past (say 1-3 years), returns have been much higher than normal returns, it implies that markets are discounting future returns now itself. So, unless you believe that the long-term return trajectory has shifted (a very tough call to make), future equity returns for next 1-2 years are likely to be lower than in the recent past, and likely to be lower than long-term returns.

It is not unusual for equity markets to deliver returns before the earnings growth comes. If there has been a period of linear rise in stock prices, it may be followed by a period of correction. This is somewhat the situation at present. Corporate earnings growth are yet to show a meaningful uptrend but stock market has done well in the past 2 years. In such a scenario, should you be raising your exposure to an asset class where future returns are likely to be lower than in the past?

We are clearly at a point in the cycle where greed is the dominant sentiment. It is evident in the violent movement in small-cap stocks, aggressive pricing and huge oversubscription of IPOs. Even though corporate earnings have been slow to pick up, stock prices have risen on the hopes of high growth in the future. Even if the expected growth occurs, most of it is likely already reflected in stock prices. So, we've already borrowed returns from the future. Markets are never rational and move from extreme pessimism to high optimism, implying that future returns are likely to be lower. In an earlier column we had talked about risk-reward being skewed at different points of time. The current time seems to be one of low return and high risk.

Longer term, equity remains the best asset class to be in, provided you remain invested when and during the market falls. The current period offers a tactical opportunity to possibly realign your asset allocation and book profits if your equity allocation has exceeded the original level. In case your equity weight is already low or you are a first-time investor, then any time is a good time to get started or remain invested. This column has been a strong votary of right asset allocation based on your investment horizon and risk profile. The right asset allocation and the discipline to stick to it during tough market conditions will align your returns with the fund or the benchmark.

In a popular kids' parable of the ant and the grasshopper, the ant keeps toiling in the summer to save food for the winter. While, the grasshopper enjoys the bountiful summer but dies in the winter as he had not saved any food. Most of us lie somewhere in the middle. We toil and save but also are also keen to enjoy the fruits. If you have been investing for some time, maybe it's time to be a grasshopper, for once.



SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

Popular posts from this blog

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now