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SIPs: Why They Are Not The Best investment At All Times?

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We so often here that investors cannot time the market, so the best investment option is the Systematic Investment Plans (SIPS) that are available from mutual fund houses.

 

But again, if your timing is not correct it is a myth that Systematic Investments Plans can make money for you.

 

Let's say that in a rising market, if you have been buying in the last 12 months on a monthly you would have made a whopping returns as the Sensex has rallied sharply by almost 30 per cent in the last one year.

 SIPs: Why They Are Not The Best investment At All Times?
But, now if the Sensex for some reason falls in the next 12 months, you have probably lost what you have made. This is because in the last one year, you have been buying units every month when the Sensex has been rising.

Month NAV of the Mutual Fund Amount Invested Units Bought
Jan 20 Rs 1000 50
Feb 20.5 Rs 1000 48.78
March 20.75 Rs 1000 48.19
April 21 Rs 1000 47.62
May 21.25 Rs 1000 47.06
June 21.35 Rs 1000 46.83
July 21.55 Rs 1000 46.4
August 21.75 Rs 1000 45.98
Sept 22 Rs 1000 45.45

Let's understand this with an example: Now, as you can see from the above table, you have invested continuously at a higher net asset value. Though you have made money on the first investment, if you do not time the market and sell at the right time, if the markets keep falling, you would have lost all the money you have made.

So, it may also be a good opportunity to en cash at times, rather then keep investing at every level. So, while analysts portray Systematic Investment Plans or SIPs as the best investment option, it is also about getting your timing right.

If you do not sell when you have made the money, what's the point in a SIP.

Also, it is not advisable to keep buying at any and every level. For example, at the moment the Nifty and Sensex are trading at historically high levels. How far can the markets go from here? At best another 2000 points on the Sensex, which means another 5-7 per cent by the year end. This kind of returns you would get in a bank deposit without any risk.

Conclusion

In essence what is most important to make money is understanding when to sell. You may say that timing the market is difficult. Agreed! But you can do a little analysis of your own. At the moment, the Sensex is trading at 18 times one year forward earnings. This is amongst the highest among Asian markets and perhaps highest in the world. Do you want to keep putting money in SIPs at this rate, when the reward for a further upside is less, while the risk of a downfall is very high.

You need to answer that question.

GoodReturns.in

Read more about: mutual funds sip
Story first published: Monday, March 16, 2015, 9:28 [IST]
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