Indian markets began the year 2008 on a very optimistic note. Sensex crossed the 21000 mark for the first time. Liquidity was ample on account of big foreign inflows. But the optimism never lasted long. Markets crashed from 21000-level of mid January to 15000-level by March end. Concerns on deeper financial problems in US led to all global markets falling sharply. Indian markets became highly volatile after the sharp melt down.
Volatility is the only one thing that seems predictable in today’s stock market! Share prices are swinging up and down more violently than they have anytime in the past five years. And this seems likely to continue.
Unfortunately most of the retail investors do not have proper strategy to tackle the volatility. As a result investors become nervous, anxious and panic. They take illogical decisions under pressure. They abandon their long term plans and redeem their funds under panic and incur losses (it is like taking a bus ticket to go to Mumbai but getting down at Hubli). The legendary investing guru, Warren Buffet, has often said, and rightly so, that the number one enemy of an investor is the investor himself/herself! This is because investors tend to get swept away by emotions and thus, more often than not, end up making hasty decisions. Some guard their savings from such volatility by staying away from equity and keep their funds in just savings account.
In the midst of volatility, it is important to remember that over the long-term growth in equity prices follow earnings growth. So, as long as the fundamentals of the economy remain unchanged, the economic growth story should continue to translate into inflation beating returns from equities. It is historically proved that over long run stock markets are the best avenues for growing one’s wealth. Indian markets have rewarded investors handsomely.
Sensex has risen by 19.68 per cent in FY2007-08, its second highest returns in the last four years, despite the sharp correction of 25 per cent from the all-time highs of 21,280 registered on January 8 this year.
Sensex was at 120 levels in 1979 April.
Today it is at 16500 + level.
Rs 1000 invested in the Sensex in 1979 would be equal to Rs 1.47 lac today.
This almost equals annualized returns of 20%...without considering dividends.
Despite a record 23 per cent decline in the fourth quarter, the Sensex has outperformed the global markets such as USA, China, Japan, Hong Kong, South Korea, Germany and Singapore by posting positive returns in 2007-08.
Well-managed diversified equity funds have given more than 30% returns during last 10 years.
No time to invest means putting your financial security in risk
India is a nation of great savers but poor investors. We work 24x7, 365 days a year to earn our income. I have seen NRIs working 12-14 hours a day. But we do not make our wealth work that hard. If we devote at least a little more time to make our earnings/savings work a little harder, then it can supplement our income well and provide much need financial security.
Many NRIs keep their money in liquid form in SB accounts for many years or keep money in fixed deposits at less than 3% interests (when inflation is 7.5% and if you grow your money at 3% you will end up with a loss). Considering the evil of inflation, traditional modes of investment which offer approximately 7-8% returns hardly leave the investor with positive returns. As a result they spend extra years in the Gulf and still fail to accumulate funds for their retirement. This is the hard truth.
Markets remain volatile over the short term and in long term they go up. Stock market correction can be steep and fast, the rise can just be as quick. Valuations which had become expensive in December 2007 are currently are at very attractive and mouth watering. By following systematic and disciplined approach investor can turn volatility to ones advantage.
Catching tops and bottoms:
The best way to make highest gain in the market is to buy at the bottom and see out at the peak. But, even the best of the analysts or market gurus failed to find the bottoms and could not predict the peak. Timing the market is impractical approach. The best and winning strategy is to follow a ideal strategy which is systematic investment plans. By following disciplined and systematic approach one invests in different levels of the market instead of timing the market and gets consistent and stable returns form the market. Investor who invests in SIP plans works volatility in his favour.
Rock – the winner:
Rock Pereira 40 working in Saudi Arabia as accountant requested me to manage his mutual fund portfolio. I saluted him for his discipline. He says ‘I have started my MF investment of Rs 4000 every month from 1995 in the top equity diversified mutual funds. For the last 4 years I am investing Rs 10,000 every month. My aim is to accumulate Rs 1 crore by the time I reach 45...you will be surprised I have already reached Rs 80 lac.’
When I checked his documents, I found that he has got approximately 31% yearly returns for his investment of 4000 every month. His fund selection is good. He also got approx 39% returns during the last 4 years. With his permission I am sharing his MF investment portfolio for the benefit of Daijiworld readers.
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Rock’s salary was less than Rs 25,000 per month till 2004 and now he earns about Rs 48,000. Despite his commitment towards his family (wife, 2 children and 2 sisters and parents) ith is discipline he as able to accumulate much more than a very high salary person can
Rocks example perfect example to prove that if a investor follows a disciplined investment strategy he will be a winner always.
Unfocused vision
In today’s financial world investing wisely is actually more challenging than before. People spend hours together in shopping malls to buy a jeans or music set or a new mobile but don’t have time to select a suitable financial tool for their investment. . As a result many investors end up with an unfocused vision to investing. They become victims of miss selling. I get a least one call or email a week from investors who purchased unit linked insurance plans (ULIP) by mistake thinking that it is mutual fund. Mutual funds are designed as the perfect vehicle to allow small and retail investors to participate in financial markets.
What is a mutual fund?
Mutual funds are money managing institutions set up to professionally invest the money pooled in from the public and uses it to buy stocks and bods. These schemes are managed by Asset Management Companies (AMC), which are sponsored by different financial institutions or companies.
Professional experienced management, diversification, expert stock and bond selection, low costs, liquidity, convenience, strict government regulations and full disclosure are the advantages of mutual fund. By investing in mutual funds investor is indirectly invest in stocks of top companies.
The biggest risks that investor face while investing in equity are the risks of choosing the wrong stocks and risks of investing at the wrong time. While investing through a good mutual fund scheme can take care of the former, investing through SIP’s takes care of the later..
In short, mutual funds are more convenient instrument rather than investing directly in the stock markets. Professional fund manager takes care of dynamic portfolio allocation. Mutual fund manager takes the responsibility of managing your funds to provide maximum returns. The greatest advantage of Mutual fund is it helps investor to diversify the portfolio. You can break one pencil but difficult to break 50 pencils tied together. Diversification not only reduces risk but also helps in optimizing returns on risk adjusted basis.
What is Systematic Investment plan?
Systematic investment plan is a simple but smart investment strategy for accumulation of wealth in a disciplined manner.. . As I mentioned earlier, there is always a dilemma in investors' mind that ponders over the right time to invest. Many investors keep waiting for the markets to come down and a lot of times, markets move in just the opposite direction leaving such investors with no option but to keep their money idle or to invest at even higher levels. Investing through SIP offers numerous benefits which help to reduce your exposure to risk without reducing your exposure to equity.
SIP is a regular investment plan for purchasing units of a mutual fund scheme without bothering about markets daily swings for consistent and stable returns. Just like banks and Post office offers recurring deposit schemes, mutual funds offer an SIP option. Investors opting for an SIP option commit investing a pre-specified sum of money at regular intervals (generally every month) in a particular mutual fund scheme. Each periodic investment entitles investors to receive units of that mutual fund scheme, which is subject to its NAV prevailing at that time.
Definitely a experienced advisor can add lots of value to investors portfolio by advising most apt mutual fund scheme based on investors financial objectives, his age and risk taking appetite. Therefore it is best to seek expert guidance.
The convenient and easiest option is to make payment through ECS instructions. Investor just has to sign ECS mandate form available along With SIP Form. Every month amount stil be deducted from the investors account.
How SIP works:
Let us take an Recent statement of one of my investor as an example to understand how SIP works.
Mr. ‘X’ has decided to invest in a mutual fund through SIP. He committed making a monthly investment of Rs 5000 for a 5 years (for SIP minimum commitment is for 6months only, maximum depending on your financial objective) in a fund named 'XYZ'
| Date | Monthly Investment | NAV | Number of Units |
| Jan 1 | Rs 5000 | 35.29 | 141.68 |
| Feb 1 | Rs 5000 | 28.08 | 178.06 |
| Mar 1 | Rs 5000 | 26.12 | 191.42 |
| Apr 1 | Rs 5000 | 25.85 | 193.42 |
NAV as of 25.04.08 is 30.95
Brief Summary
Monthly Investment: Rs. 5000
Period of investment: 4 months
Total amount invested: Rs. 20,000
Total number of units credited to 'X': 704.58
Average cost/unit: Rs 28.39
Present NAV as on 25.04.08 = 30.95
Value as on 25th April 08 = 704.58x30.95 = 21,806.75
If Mr. X invested lump sum amount Rs 20,000 on Jan 1 at NAV 35.29, he would have got 566.73 units and present value of the same would have been 17,540.00
Advantages of SIP:
1. SIP makes market volatility work in his favour.
“View Mr. Market as having a disorder and being in a manic depressive state and take advantage of this state of disorder." Warren Buffett
Concept of SIP works because markets are volatile and sometimes directionless. SIP is smart strategy for volatile and unpredictable market. One of the main reasons why investors panic when the markets are down and volatile because they have committed a considerable amount of funds to equity, usually at one go.
Opting for Systematic investment plan, investor automatically comes to participate both in the upswing and downswing in the market. For the same and small amount of regular investment, investor buys more number of units in a falling market. This “small” amount would differ from person to person and could be little as Rs. 1000 or even 5000 or 10,000 or 25000, depending on your level of comfort.. Furthermore, a fixed amount of investment restricts investor to buy fewer units in a rising market. Investing through SIP ensures that you do not commit the blunder of purchasing units when the market is at its peak. Furthermore, SIP investor remains invested every month which minimizes his chances of missing out on the sudden rallies on the market. SIP investor is always a winner.
2. SIP – Disciplined long term investment stratergy.
Being disciplined – It’s the key to investing success. Management of one’s finances to attain a defined goal calls for a lot of discipline, many a time self imposed. SIP is a tool which can help you, inject this discipline in your financial management efforts. Take example of Rock Pereira. He never had more knowledge on investing. He is going to be “crorepati” soon just because of his patience and discipline. Think of each SIP as laying a brick. One by one, you’ll see them transform into a building. SIP ensures that you attend your long term goals before you are given to the temptation of frittering money on fancy items. An SIP gives investing for your future the same importance, as paying your electricity bill. As a result you are more likely to stick with your plan, until you reach your goal.
3. SIP - a safe vehicle to reach your financial goals
By investing an amount of investors choice, he can plan for and meet his financial goals, like funds for a child’s education, daughter’s marriage, taking care of old parents, comfortable post-retirement life.
Examples: By investing in SIP for 15 years at 15% compounding growth p.a you can build a fund of Rs. 30 lakhs for your 5 year old child’s educaiton (engineering education if it costs 7 lakhs today, ill cost approx 30 lakhs after 15 years.)
Similarly investing every month 10,000 for 15 years you can accumulate Rs. 67 lakhs for retirement at 15% p.a. Mutual fund SIP’s have given more than 20% annual returns for last 15 years. With 20% compounding interest you can accumulate more than 1 cr.
4. SIP - reduces your average cost of investing
The benefit of Rupee Cost Averaging is the most lucrative advantage of SIP. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you may reduce your average cost per share over time. This strategy, called 'rupee cost averaging', helps make market fluctuations work for you, and reduces the risk that you'll invest all your money just before a market downturn. The biggest advantage in SIP is that you need not shell out a lump sum amount at one go. Market might go up from current position or might go lower. But because of rupee cost averaging you’ll be getting in on ground floor!
5. SIP - Power of compounding and outpacing inflation
While often the result of positive force - economic growth - inflation can have a serious effect on your portfolios if your income and investments are not keeping pace. Inflation (rise in prices) can steadily erode the value of your income with passage of time. Inflation can really hurt in retirement and long term goals like child’s education unless it is taken into account when building your funds.
An MBA education which required just Rs 50,000/- in 1980 costs around 5 lacs today. A monthly expense of Rs. 20,000 today would shoot up to Rs. 85,000/- even if inflation rate is 6% (present inflation rate is more than 7%)
However, SIP’s provide opportunity to beat the inflation and offers returns that outpace inflation –through the power of compounding. Time is an investor’s best friend (or worst enemy if you wait too long) because it gives compounding time to work its magic. Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal..
Your twilight years can be a breeze if you use SIP to optimise your savings. Just like the early bird, the early investor takes home a bigger packet than the investor who starts late does. The key therefore lies in starting earlier, and giving your investments a longer time to grow. Money starts multiplying, more towards the end.
Example – Starting Early
| Suppose you start investing in a diversified equity fund through SIP at age | 25 years | 35 | 40 |
| Your monthly investment | Rs 5000 | Rs 5000 | Rs. 5000 |
| You stop investing at | 60 | 60 | 60 |
| Your total investment | Rs. 21 lakhs | 15 lakhs | 12 lakhs |
| Asuming compounded annualised returns from the fund is 15% your savings grow to | Rs. 7,43,08,225.00 (Rs. 7.43 crores) | 1,64,25,368.00 (Rs. 1.64 crores) | 75,84,774.00 (Rs 75.85 lakhs) |
Note from above that difference of Rs. 5000 per month over 5 years (35 to 40) can lead a difference of wealth of 88 lakhs!
6. SIP – easy and convenient.
You can invest in SIP effortlessly. Simply you can give the post dated cheques for an amount of your choice or more easy is to sign ECS form with MF application form. As proof of identity you have to provide copy of your pan card. The plans are completely flexible. You can invest for a minimum of 6 months or as long as you like.
“20 years from now, you will be more disappointed by the things that you did not do, than by the ones that you did…so, explore, dream and discover” – Mark Twain.
India is projected to become one of the top three economic powers in the world. So be a part of Indian growth story through Systematic Investment Plans. Do not allow current market turmoil to throw you off balance, Through SIP reduce your exposure to risk without reducing your exposure to equity. Be a winner by turning market volatility to your favour.
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