Navigating Equity Investment through a Smarter SIP

Conventional SIP is a close-ended investment scheme with the compromised flexibility

Navigating Equity Investment through a Smarter SIP
Navigating Equity Investment through a Smarter SIP
BC Marwaha - 06 May 2021

By investing in stocks or a mutual fund scheme, the aim is to get the best possible returns, with minimal effort and risk. Conventionally, the Systematic Investment Plan (SIP) is vouchsafed as the most common and best way to achieve the set objective. However, it is beset with the obvious risk of investing at a relatively higher price or NAV, on a particular fixed date of the month. In other words, through SIP, one cannot catch the falling price of stocks, because of the binding of the date of investing.

Thus, I have thought of a slightly different way of investing than SIP, named as “Smart Systematic Investment Plan (SSIP)”. It is different from the conventional SIP, which these days are a watchword, and a sort of commandment in the financial world, as a powerful mode of investment in mutual funds. But what I am going to suggest here is slightly different, but possibly more rewarding and holds true not only for investment in mutual funds (MF) but also in equities.

The basic principle of SSIP is to abide by the dictum- “ in stock market volatility is not an exception, but a norm, and if we could grab the lower price level, it should prove advantageous”.

Main Features of SIP:

  1. Investment in a specific scheme of a mutual fund.

  2. Fixed amount of monthly investment.

  3. Fixed date of the month for withdrawal of installment from investor’s registered bank.

  4. Fixed period of investment.

  5. Linked only to one particular bank account of the investor.

This implies that an investment with a guarded binding, with the only open-ended option that the investment might be stopped anytime before the agreed date of maturity if for any reason the investor wants to stop the SIP. A very strong advocation in favour of SIP is that it offers automatic averaging of the cost of holding and a safeguard against market volatility. But Still the risk of overall low returns through a SIP could often be more, for two reasons. Firstly, if your investment cycle starts in the bull phase and ends in the deep bear phase, and secondly if the price of the stock or MF happens to be consistently high on the date of withdrawal of installment. So, before I go to specifics of SSIP, let us understand the advocated benefits of conventional SIP.

Benefits of SIP:

  1. It is an easy and convenient way of investing in a carefree manner.

  2. Investment may start with an as low amount as Rs 100 per month.

  3. Most suited for people having meager knowledge about investing in equities.

  4. Most suited for very busy people having no time to research and scan data.

  5. No follow-up is required on day to day basis. One may start a SIP and forget for the determined period of time.

  6. For any reason, if one is not satisfied or have some financial constraints or need, the scheme could be closed prematurely. On the other hand,it probably does not offer flexibility to revise the job rate of installment for investment, intermittently during the tenure of the scheme.

  7. It is believed to ensure the automatic averaging cost of holding a fund. However, if the price of the fund on the fixed date of investment happens to be high consistently, the aim of better averaging will be forfeited.

All in all, I regard SIP as a passive way of investment, with a binding. Thus I felt the need for a rather active and potent way of regular investing, with better returns. Hence, I devised SSIP, with most features similar to SIP, but keeping the date of investment free and flexible, that is, open-ended. In other words, while SIP is a close-ended investment, SSIP is an open-ended Investment option.

Nevertheless, I believe that to get the best returns through SIP or SSIP, one should go for either one year plan or five year or more plan.

Main Features of SSIP:

  1. The amount for monthly investment may be variable, but with a fixed minimum, equal to one wanted to earmark for SIP.

  2. Rather than the binding for one scheme of a mutual fund, pick a valued fund or a stock on an opportune day of the month. That is, invest when the indices fall consistently for two to three days.

  3. Keep the minimum period of such a systematic investing as one year.

  4. May make payment as per your convenience from any of your bank account linked with your Aadhar card.

  5. With small investments on a systematic basis regularly, one could build a handsome portfolio over a period of time.

Benefits of Investing through SSIP:

  1. In contrast to conventional SIP which is a close-ended way of investment with the least flexibility, SSIP is an open-ended way of investing systematically with the least bindings.

  2. Under SSIP, except for the amount of monthly installments, everything else is flexible. Even the amount of monthly instalment ought to be fixed only for the minimum amount ,but could go for higher contribution depending upon the availability of funds in a month.

  3. The success of this system, however, calls for disciplined investment with self-commitment for regular monthly investment, as per one’s convenience at least for a year.

  4. Expectedly, the returns from SSIP ought to be relatively higher than SIP, simply because of lower purchase price.

  5. It helps to utilise market volatility with better averaging of cost of holding. In other words, investing through SSIP mode requires a simple follow-up in the form of casual tracking of the stock market. That is, invest when the market declines consistently for two to three days, to get the best price of a chosen stock or a mutual fund, for the month.

Conclusion:

In fact, SIP is a close ended and passive systematic way of investment, with a binding, whereas, SSIP is an open ended smart way of systematic investment, where the date of investment is flexible, which makes all the difference. In other words, the primary difference between the two is, that SSIP has date of investment free. Accordingly, with little discipline and casual follow-up of volatility in stock indices, that is, to buy a stock or a mutual fund when the stock market declines consistently for two to three days, in SSIP mode, one could definitely get relatively better returns than the SIP. Thus it may be desirable to invest smartly through SSIP mode, with little follow-up, that is, “with little pain more gain”.

The author is a Blogger and former employer with the Government of India

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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