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.
|Month||NAV of the Mutual Fund||Amount Invested||Units Bought|
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.
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.