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Systematic Investment Plan (SIP) myths

, October 30, 2015, 0 Comments

sip-myths-marketexpress-inMost people have an extreme view on SIP. Some consider it as a heavenly safe ‘instrument’ while some consider it as a volcano. Rarely people have moderate views on it.

Now, what does the above sentence really mean? Very few people would have noticed the singe inverted comma around the word instrument in above line. Those who have understood the reason behind this comma can close the browser and read something else. Rest can continue reading further.

First, let us be clear that SIP is not an instrument. It is only a method of investment. Technical guys – This is similar to the statement: Agile is not a technology, it is simply a methodology.

For those who simply parrot the word SIP, here is the long form: Systematic Investment Plan. Did you notice that there is absolutely no mention of ‘investment in what’? This re-enforces that this is just a methodology of investment and not an actual investment.

Let us take a simple example: Doctors say that Sports is good for health. Here they do not tell us which sport. They simply tell us ‘Sports’. The reason being, the sport selection is left to you. Playing any sport is important, which sport you are playing is up to you and you should decide it as per your liking, ability, agility and time constraints. Similarly, starting investments systematically is important. The ‘where’ and ‘which’ part is left to investor to decide as per his needs and ability. Going back to the sports example: some like playing cricket, some like swimming, some like cycling, some like running and so on. In investment, liking is converted to goals or needs or wants.

Here, we need to have a statement like: “If you want XXX in x amount of time period, then you must invest in YYY for ZZZ number of periods”. Here, if you are planning to invest systematically and automatically, you are left to do a SIP. The SIP is just a regular and automatic investment in particular scheme. It is a method of investing in any asset regularly. The underlying asset can be volatile or stable. The SIP aids the so called ‘rupee cost averaging’ concept if and only if the underlying asset is volatile.

Example: If in a month, you do an investment at a NAV of 10. Next month the NAV rises to 20. Again you do your investment. Here, your average cost is (10+20)/2 i.e. 15. So, your average cost of units is 15 while the market rate is 20. This is an extremely simple example to start with and that too with an assumption that NAV rises after you purchase. It may also be the case that first you purchase with a NAV of 20 and then the next month the NAV drops to 10. Again, your average cost is 15 but the market rate is 10. Both the scenarios are extreme in nature since both assume rise and fall of NAV at 100% absolute value (the XIRR would be much extreme).

The AMCs will generally show you the first example and make you believe that SIP = profit. Every hoarding will show this positive scenario and ask you to start a SIP. Due to these large scale positive advertisements, people have an extreme view of ‘SIPs are safe as heaven’.

When we talk about NAV, most people will relate it to equity or share market. By now, we all know that market rise and fall can be brutal. When the market falls, the newspaper carries a headline like ‘retail investor lost 3 lakh crores in a single day’ or ‘richest man loses half of his fortune in a single day’. Although, the numbers are true, they are taken out of context. However, since such things are bombarded in every newspaper, we are scared. Hence, the extreme notion of ‘SIPs are fake or chorgiri’.

Then, you may ask, what is the moderate statement? The moderate statement is: SIPs are as risky or as safe as their underlying asset!

SIPs are not novel concept for Indians. We are SIP investor since ages. The only thing is we did not call it by name SIP. We called it by other names like bank RD, FD, chit funds, bhishi yojana or thoda thoda sona le jaou scheme. If you notice, in all these schemes, we invest small amounts regularly and hope that we would get some size-able corpus at the end of the maturity.

The recent SIP term is just the hype created by AMC and media. AMC wants to ensure that they regularly get your payments and you do not stop due to some reason. Media wants some or the other topics to continue and garner TRPs. It is your money; you have to decide how it is invested. You can chose to automate it by registering for a SIP with AMC or you can simply put down your monthly investment quota by manually performing a transaction on the AMCs website.