SIP Investment: Why You Should Start Now Rather Than Waiting For Market Dip

A systematic investment plan or an SIP has become a common tool used to invest into the mutual fund space. Often, first time investors wonder about the right time to start investing, that is, whether they should begin parking their investments when the market is at the peak or when the numbers dip into the reds.

“Timing the entry and exit in the market is tough. SIP helps tide over market cycles without impacting the returns based on timing,” said Vinit Iyer, managing director of Prudeno Wealth Advisors.

Kshitiz Mahajan, co-founder of Complete Circle Capital echoes that it is important to be in the market than to attempt to time it perfectly.

“When you keep waiting to cash the bottom, one misses an overall input value in the market that can deliver a good return. Over a period, the money that was missed over time would have generated a delta,” Mahajan said.

It's a fact that the benefit of SIP is more evident if the money is invested when the market is dipping, or when the market is at top and has begun correcting. But according to these financial planners, it is better to add some money to your SIP rather than trying to time the market.

Pacing Lumpsum Deployment

If a person has a lumpsum amount to deploy, it is better to spread it through the next six months or a year, the experts said.

“If a lumpsum of Rs 10 lakh needs to be invested, then one can invest in a debt fund and have an SWP (systematic withdrawal plan) coming in,” Iyer said.

Weighing-in on the lumpsum investments, Mahajan said that money flowing into respective schemes systematically would be the better call.

“When you have a lumpsum amount to invest, then you should do a systematic transfer plan or STP. If you are a salaried individual then one can do an SIP,” he said. During the last few years, lumpsum investing might have delivered better returns but anyone with a monthly income would find SIP a better choice.

“The lumpsums might have given 2% extra, but in the market with over 10% returns, it is better to start in a disciplined way,” Mahajan said.

Stepping Up SIP

A 10% return is the most that people talk about as the practicality of anything over this would be a squeeze, given the increasing cost of living and pace of increments. What's important to remember is that any incremental money put into the market with discipline will help compounding work better, the experts noted.

A step up of 10% has the capacity to more than double one's corpus over a 20-year period, according to Iyer's calculations.

“Constantly continuing the step up brings a staggering difference. When there is additional money coming in, one can add to their SIP,” said Mahajan.

Accounting For Feast And Famine

The concept of value averaging is basically adjusting the money one invests based on market performance. This means that there is a set amount that one invests and hope to make based on returns. If the market delivers over or under the target returns, then one accounts for that in their contribution.

To illustrate, if one invests Rs 100 with the assumption of 12% returns, then the person expects to have received Rs 112 by end of the year. However, the markets might not have performed that well, and one only ends up with 5% returns, which gives Rs 105.

Here, the cure is contributing not just Rs 100 but Rs 107. This covers the Rs 7 lost because of the market not performing as per the expectations. This, done on an annualised basis, has the power to generate more than 5% alpha when compared to simply investing.

“You're putting more money when the markets are down and putting less money when the markets are up. That helps generates the alpha,” said Iyer.

There is also the aspect of capital gains that needs to be considered by the investor when adopting this method. It also calls for active participation when the markets are volatile.

“This might be a bit difficult for salaried people as they are asked to step up their SIPs first rather than do the cost averaging. Someone who has this kind of surplus can only participate,” Mahajan said.

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