SIP becoming hot in the capital markets menu

Indian households have stepped up their exposure to the capital markets. So it is significant to look at style of investing. Various asset classes have been emerged and people have started taking exposure towards many complex products. At the same time it is crucial to make a risk-return trade off.

Investment market:

Our investment market is maturing and equity has been the preferred asset class among investors. Equity investing which gives high returns as well as high risk. Hence the style of equity investing is essential. Investment advisors have come up with financial planning models and products matching investor’s profiles. At this age, the investing community has to decide about their choices, pattern and safety in terms of capital preservation or to minimize loss.

Investment styles:

Investors do have their own approach towards investing. Many directly invest in sector specific stocks e.g. Satyam or Infosys in the IT category or any other sectoral stocks where fear of loosing money is the highest due to sector concentration and some invest in a mutual fund having a basket of diversified stocks across sectors to minimize risk.

Working of SIP:

Under this facility an investor can invest any fixed amount every month for a per-decided period of time usually six months or one year through post-dated cheques or ECS facility of any bank at applicable NAV prices. This process helps the investor to average out their cost of investments over a period of time and thus overcome the short term fluctuations in the market. This strategy is called dollar cost averaging.

Dollar cost of averaging:

Not many investors can time the market - get in at the bottom and get out at the top for a fat profit. For such investors the dollar cost averaging is the best way to go as it eliminates the market timing decision. With this strategy an investor will always be fully invested to catch the turns in the market. The example below will show how

Regular Investment ( At the 10th of every month )	Unit Price	Units Acquired
100	11.79	8.48
100	12.11	8.26
100	11.17	8.95
100	11.62	8.61
100	13.59	7.36
100	13.82	7.24
100	11.82	8.46
100	10.3	9.71
100	10.38	9.63
100	9.74	10.27
1000	116.34	86.96

Average unit cost to the investor Rs 11.50

Average unit price to the investor Rs 11.63

As given in the table above, the investor own 87 units of the fund by investing Rs 1000.These units become worth more than what the investor has paid for it. The average price for his 10 investments is Rs 11.63. However, the investor has acquired these units at the average price of Rs 11.50.

The idea behind dollar cost averaging is to invest for the long term. That way the investor will be sure to catch the down markets and be fully invested in the up markets. However, he should stick to the investment the down market; otherwise he will be forced to sell units at a loss.

Synopsis:

v In a maturing and risky capital market it is essential that the investors should be systematic in their approach to avoid risk.

v Style of investing through an SIP of a mutual fund is the key for long term investors.

v Dollar cost averaging is key to achieve long term objectives