The best option for an investment – SIP

Call it the retail investor’s dilemma. When markets rise, most of them regret not investing when the stocks were down. Exactly what people felt when they saw the sensex rise 50% in less than two months to cross the 12,000 mark. Instead, when markets plunge, they get scared and pull out or stop investing. Again, that’s something many investors did few months ago. It is a standard joke in the market that individual investors are always late comers. They enter the market when it is at historical high and they exit when it really hits a low. If anyone wants to make money they should do the opposite. They should buy when the market is low and sell when it is high.

That’s easier said than done. For example, nobody predicted that the sensex would traverse from 8,000 to 12,000 in less than two months. Who can say what is the bottom? For example, when the market was at around 8,000 there were some who predicted that it would hit 6,000. That is why investors shouldn’t get caught up by the highs and lows in the market and continue with their regular investments if they want to make money.

According to him, the best way to do it is to opt for a systematic investment plan (SIP) of a mutual fund (MF) scheme. SIP allows you to invest as little as Rs 100 a month in an MF scheme of your choice. You can invest even with a small amount every month in a scheme for a minimum of 12 months. If you wish to stop investing at any point of time, you have the option of asking the fund house to discontinue the SIP.

The best thing that a SIP promises, experts say is to bring financial discipline into your life. Most people start investing at some point in life. But majority fail to continue with it or review it periodically. Finally, money gets stuck somewhere, mostly in some unproductive assets. SIP also ensures that you don’t waste time to build a decent amount before kick starting the investment plan. Most people have the false notion that they need large amounts to start investing in stocks. This is not true. You can start right away by investing a small amount regularly. Another alluring prospect of an SIP is the benefit of what financial wizards call dollar cost averaging. Simply put, when you purchase stocks on a regular basis at different levels of the market, you benefit from the averaging of the purchase cost. This can enhance your return possibilities. For example, if you are buying a stock at Rs 10, Rs 12, and Rs 8, your purchase cost will be Rs 10. When you are doing it for a longer period, chances are that your purchase cost will be really lower than a one time purchase.

If you look at any successful investor, he or she would recommend regular investments at periodic intervals. Most would vouch that it is the only way to make money since nobody can predict the course of the market correctly all the time. That is exactly why most advisors recommend SIP to their clients. I tell my clients to forget about the highs and lows in the market. If you have the time to wait for 3-5 years the best way to invest is to start an SIP. The market may be down today, but it will bounce back over a period of time. If you are long term investor, you should stick to your regular investment plan to make your investment grow better.

SIP it all the way:

1. Imparts financial discipline to life
2. Start investing with a small amount
3. You invest irrespective of market conditions
4. Cost averaging brings down purchase cost
5. Enhances possibility of better returns.