Friday, February 19, 2016

Don't time the markets by stopping and starting SIPs

For what is supposed to be a simple (and simplifying) idea, there are way too many misconceptions about the SIP (Systematic Investment Plan) way of investing. In general, those who have a punter's approach to investing carry over that approach to SIPs, trying to stop and start SIPs by timing the markets.

Back in 2010, I remember investors claiming that SIPs were no good, and that they had barely broken over the preceding years. Generally, these were people who had stopped their SIPs after the crash of 2008, and then restarted after the recovery in 2009.

The basic idea behind SIP is that while the general direction of an equity investment is upwards, it is not possible to reliably predict the actual fluctuations that it may undergo as part of its general trend. Instead of trying to time one's investments, one should regularly invest a constant amount. As time goes by and the investment's Net Asset Value (NAV) or market price fluctuates, this will automatically ensure that when the price was low, you ended up purchasing a larger number of shares or units. Eventually, when you want to redeem your investments, all the units are worth the same price. However, because your SIP meant that you bought a larger number of units whenever the price was low, your returns are higher than they would have been otherwise.

That's the way it should work. However, you have to allow it to work by going on investing when the market is low and not try to time it. At one level, SIPs are nothing more than a psychological trick to make you invest when the market is low without having to guess what it will do next.