Is S.I.P a Sensible / Senseless Investment Plan?

Wednesday, December 07, 2011

Is S.I.P a Sensible / Senseless Investment Plan?

For a investor in Mutual Fund…….SIP (Systematic Investment Plan) has become in thing now a days. Most mutual funds houses have given following as the main advantages of investments in SIP.

“SIP's most important characteristic is that it does away with the need or effort to time the market.”

“Rupee Cost Averaging - Most investors want to buy stocks when the prices are low and sell them when the prices are high. But timing the market is time consuming and risky. A more successful investment strategy is to adopt this method called Rupee Cost Averaging. By investing in an SIP you end up buying more units when the price is low and fewer when the price is high.”

Let us see all the arguments in details……

SIP's most important characteristic is that it does away with the need or effort to time the market / But timing the market is time consuming and risky:-

I think this is the most misleading arguments on the SIP…..

Why You Need to Time The Market?

Have you ever done something without a need for the same……Don’t you ask…..Why you need to do this or that? When it comes to spending even Rs.100 you ask, why? So, when you invest your hard earned money in Market…..they are advising….“you should not spend time in timing the market”. You just go on investing every month….some day you will make money. Are you ready for this?

Is it worth the efforts?

Naturally, it will take efforts to study the market and investment opportunities at given point of time. You will fail in the initial stages……but the learning from your failures will be your real assets….you can built on this experiences and can grow up in your life….but if you just blindly do….as they suggest….you will be equally blind after 5-10-15 years also.

The Logic of Averaging:-

Let us see that you buy a shares at Rs.100. now the price is Rs.95…you add more…now the price goes to 90/85/80/75 and as a SIP investor….you buy at all the levels. Your average is Rs.87.50 and now the market price is Rs.75. Don’t you think you would have been better off, if u took the effort of timing the market!!

Have you ever thought a scenario like JAPAN….where market has gone down and remain down from 1991 to till date…from around 40000 to 8000….What will be the performance of SIP in Japan like situation!! We prefer Stop Loss as the best solutions when we go wrong.

Now, Let us see the broader picture…..

Let us see the track record of Wealthy People:-

If you check the Forbes 500 list of the Richest Persons …..you will find…innovator and businessman like Bill Gates, Investors like Warren Buffett, Industrialist like Mukesh Ambani or Lakshmi Mittal. In other words, big wealth has come either from Innovations, Businesses, Investments or Industries. Not a single person is wealthy because he invested in SIP or Mutual Fund. In fact, there are wealthy people…. …..who are there because they are running mutual funds!! So, Track records of the wealthy people around the world do not suggest that SIP is a right way. You always go for track record..…..why not go for this one?

How do you buy a Flat?

When you buy a flat……you decide the location, area in square feet and price per sq ft. You make the down payment of say 10% and go for loan for 90% and pay that 90% in EMI over 5/10/15/20/25 years. When you do this….you are sure for 4 things….

I. How much square feet you are buying?

II. What will be the total investments with Interest?

III. What is the expected price in coming 3-5 years?

IV. How much rent you will get from the day one?

V. Overall, you control your asset.

However, when you do the SIP…..

1. You do not know…..how much unites you will have after a given period of time?

2. What will be the average purchase price of all those units?

3. What will be the price in coming 3-5 years?

4. When you do not know the Units only, you do not know the dividend you will get (depends on performance)?

5. Overall, there is no control with you.

( Note:- I have taken the example of flat just to bring home the point….that if being a small investor as they tell you, you can buy a flat with 10% of money…..same way….being a small investor you can also invest in direct equity with your little money with leverage….you just need proper education !! )

Last point remains…..

Timing of Market:-

The fundamental belief of financial literature is that market is perfect, market knows everything and market price reflects the same. This is the most dangerous misconception created, taught and marketed like anything.

Time and again Mr.Warren Buffett has said……. “they ( financial experts) have observed that market is perfect for some time and they generalized that it remains perfect for ever. Had I believed in them….I would have been on road with a bowl”

Since market is imperfect, it pays to spend time, money and efforts in timing the market…….if it is perfect……you need not time the same….in fact, you can not time the same…as it is perfect from the beginning.

What Is Market?

Share market is a collective psychological response of all the investors at a given point of time based on a given facts or perceived positive or negative factors or combination of all.

It may be difficult to accurately measure the collective responses however it is not impossible. You can learn over a period of time.

My Personal Call:-

While studying management, I have been taught the concept of role model…the idea behind this is very simple…if you aspire to become great in any field, find out the best person in that field, make him your role model and do what he has done…..you will also get what he has got !! My role model is Mr.Rakesh Jhunjhunwala. He has not become successful by investing in SIP……How can I?

If you do not have any role model….find out one….prepare yourself to become like him….or SIP will be the only way out for you!! Make your choice.

How We Are Managing Your Destiny?

They say…. “Your thoughts lead to action, action to habits, habits to character and character to Destiny.” All our efforts are aimed to give right education and we know that right education will lead to better thoughts and ultimately better destiny for you all.

Live With Passion…Invest With Passion.

Hitesh Parikh.