A systematic way to ride the storm

[Sukumar.N]

MUMBAI: Investment advisors regularly pontificate the maxim of staying
invested over a long term horizon to clock gains in equities, but in
reality, the idea for the investors is difficult to implement. After
all, with the free fall in the markets due to the global meltdown,
apprehensions are running high of losing money and the appetite to
stay investment is practically zero.

Small investors, who had taken to investing in equities through
systematic investment plans (SIP) in a big way over the years, are
pressing the panic button now, as the Sensex has breached the
psychological support of 10,000. This downward spiral has got many to
contemplate discontinuing their SIPs, with an intention of
transferring the funds to less volatile asset classes. However,
financial advisors caution against taking such a step at this point in
time, as it would defeat the very purpose of starting an SIP. “When
you start an SIP, your objective is not to time the market. You are
looking to average out the cost of investing over a long horizon.
Exiting the same in a bear market could, in fact, prove to be counter-
productive,” reasons Swapnil Pawar, director, PARK Financial
Advisors.

Investing through the SIP route is deemed apt for retail investors
when the markets are in a staring-down-the-barrel mode as this is when
SIP’s USP – rupee-cost averaging – comes to the fore. The amount that
you direct towards the SIP remains constant every month, which means
that you buy less units when they are expensive and more when they are
attractively priced. In addition, the fact that your entire investment
will not be left to the mercy of the indices’ roller coaster ride at
one go can also be quite comforting.

Therefore, starting an SIP when the bulls are in charge and turning
the tap off during a bearish phase would mean disregarding the
fundamental principle of systematic investing. All efforts would come
to a naught if you stop your SIP. Timing the market is almost
impossible and hence an SIP, with its disciplined approach, qualifies
as the perfect antidote to the prevailing uncertainty.

At the moment, one needs to continue to repose faith in the ‘buy low,
sell high’ philosophy and snare high quality stocks and MFs that are
available at bargain prices. “One should go ahead and invest now, and
choose SIPs and systematic transfer plans (STPs) as your vehicles for
navigating choppy markets,” says Kartik Jhaveri, director of financial
planning firm Transcend India. One could opt for an STP that entails
parking a lump-sum in a liquid fund and transferring a fixed amount
into an equity fund at regular intervals. This method can be ideal for
those investors who are sitting on a stockpile of cash (that earns
zero returns), but are reluctant to put their money into equities
straightaway. Investing through an STP would ensure that they earn
decent returns and at the same time avail of the opportunity to
participate in equities.

While staying invested, investors should re-jig the portfolio, if the
performance of the fund is not on par with other contemporary funds.
“Even here, you need to think of stopping the SIP in that fund only if
its performance has deviated by more than 5-7% from the category
average,” explains Mr Jhaveri.

Clichéd as it may sound, systematic, long-term investment is the only
method of riding the storm. For instance, if you had invested in the
markets in November 2003, when the SENSEX was hovering around the
5,000-level, you would still be sitting pretty at the current level,
despite the mega plunge since January this year. Many experts are of
the opinion that India growth story has several chapters in store and
it’s too early to start thinking about the epilogue. Thus, there seems
to be every reason to continue with or even start an SIP in a
diversified equity fund with a 5-7 year horizon.


N.Sukumar
Research Analyst
www.kences1.blogspot.com