Why I will stop my standard SIP now

First an admission – like many other investors, I have also invested in MF through the SIP mode. When I started way back in 2001, my investments were all one time and they were few. After we paid off our home loan I started MF investments again and it was again one time investments. It was only in 2008, after the stock market crash that we started SIP and have been doing it in a regular manner till now. The results have been mixed, some funds have done rather well while others have been kind of mediocre performers. All my current SIP get over in October and I will not be renewing them.

Before I come to the why part, let me be clear on what I call as standard SIP. In simple terms it is a plan where you invest a fixed amount every month to buy units of a particular Mutual fund at the ongoing NAV prevalent on that day. Obviously, in some months you will get more units and in others you will get lesser depending o the NAV. The other feature of standard SIP is that you can automate the process. So the money directly goes from your bank account and once you set up the SIP, there is nothing you need to do, till the time comes to renew it after the duration you had originally specified.

My strongest objection to this model is this – it is completely logical for me to buy units at a lower NAV, in fact I would love to buy more BUT it makes no sense to spend the same money when the NAV is higher. Think about it through an analogy that will hopefully make it clearer. If you know that on certain days of the month, there are some good discounts in your Super Market, would you not plan to make most of your purchases on those days? Sure, you will not be able to stop all buying on other days as you need groceries round the month, but you will certainly make your bulk purchases on the days of the discounts. If you follow this for your groceries will it not make sense to do so for your investments, which are much higher?

I can see many of you jumping up to say, “but you are trying to time the market, and we know that does not work”. Really? Who told you so? Let me offer a counterpoint – the whole objective of all the continuous analysis that goes on in the world markets is precisely for the purpose of timing the markets. Yes, trying to time the markets by pure guesswork, without any knowledge or skills is obviously a non-starter. But thankfully, calling the trend of an MF NAV is  a lot easier as compared to an effort that involves predicting the pricing trend of a particular stock. So it is quite likely that if the Nifty and the Sensex is moving up, the Large cap oriented funds are likely to move up too – and vice e versa.

OK , so what should one do in practical terms. More importantly, assuming that I am still investing in the funds that I have a current SIP in, how do I want to invest in those? My broad plan is as follows:-

  • Take Nifty as the base index for ICICI Pru Focused Blue Chip fund that I want to continue investing in.
  • Decide on a base Nifty level for October. I think it will be 7800, that is the actual Nifty value will oscillate around this.
  • On any day, if the Nifty value goes 5 % below this level, I will invest the whole amount I wanted to invest in October.
  • If the market falls 2-3 % in a day, I will take a call based on what else is happening around the globe. If I think the fall is isolated then I will invest 50 % of my October investment. In case I feel it is a trend, I will wait for my 5 % drop.
  • Just in case the market keeps rising in October and ends at 8200 or so, I will simply not invest in the month. Remember, unlike debt, equity returns have nothing to do with the time you are invested in them. Most people sadly do not understand this but it is really important that you do.
  • If on the other hand, the Nifty falls to 7500 in October, I may invest my November allocation in October too.

Will this work? Well, as long as you are able to judge the base index correctly and have a rough idea about the spread on either side it is bound to work. The NAV of my MF will be far lower at Nifty levels of 7800 than it will be when Nifty is at 8200. So there is absolutely no way that this will ever do worse than a standard SIP, even with luck on it’s side.

Should you try this? That is clearly up to you. All I can say is that logging into the ICICI MF website and pressing a few keys on my laptop is well worth the effort if it helps me buy my MF units at a lower price every month. For me the decision is made and I am going to invest in this manner from November. Will share an update in the blog after 3-4 months.

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26 thoughts on “Why I will stop my standard SIP now

  1. Having zeroed in on a scheme, why not replicate the fund, both in composition and weights, over a period of time, for better control and superior results. That removes the limitations of a fund manager because of the size of AUM and his administrative costs unless he intends getting share allocations under favourable terms – say like LIC and public sector divestment.

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  2. Respected sir
    After long thinking and your post in Facebook before 3-4 months about this idea. I have stopped all sips and doing lump sum as advised by you. I use nifty 200 DMA as base .
    Thank you very much .
    Praise you for going against sip euphoria, well done. I know you are 100% right .

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  3. This is interesting. But I have a basic question.
    If Nifty falls on day X, will the MF NAV fall on the same day or will it fall on the next day?
    What happens if Nifty falls during the first half but rises in the 2nd half of the day?

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    • If you put an MF order today before 2 pm, you will get units at the NAV of the MF which is determined by end of day.

      Yes, sometimes intra day variations are large but that is something you have to take in your stride.

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  4. You say ” it is completely logical for me to buy units at a lower NAV, in fact I would love to buy more BUT it makes no sense to spend the same money when the NAV is higher”. How do you know beforehand whether the NAV is higher or lower? You cannot know unless you are predicting which way the market will go and at best this has a 50-50 chance even after detailed analysis.Also you compare this with “discounts” at the Supermarket where you know before the purchase that there is a discount.The difference in the stock market is that this “discount” or “premium” become apparent only post facto i.e after the purchase.So in my humble opinion this is not comparable at all.Chances of succeeding with above are no higher than a normal SIP.Both are a matter of chance at least in the short run.

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  5. So in nut shell you will change your base nifty assumption month on month !

    Q1 What if Nifty goes up for a continuous 3 months or say stays flat for next 3 months ?
    Q2 What would you suggest for people who can’t calculate this complex base thing ?

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  6. Lumpsum minimum investment amount is 5k

    Sip minimum investment amound is 1k.

    Mr. X needs to invest 10k per month in equity MF …He wants diversification and hence have decided to allot this amount in 4 MF schemes.

    He has no option but to do sip . Your investment style doesn’t work for Mr. X

    2) Time in the market is more important than timing the market. Sips are usually for long term 15-20-25 years . Wasting my energy in tracking market daily and investing accordingly makes hardly any sense.
    If my investment horizon is 15-20-25 years , your strategy will hardly give me any additional alpha .

    3) Just to make your stragery better for you …invest ur monthly investment corpus in liquid fund or Arbitrage fund on 1st of every month and do daily stp ..u will get better cost averaging of 30 days a month.

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      • How it largely benefits advisers and fund house ??

        You need to see the larger picture

        Sips help investors to invest in a DISCIPLINED manner.

        In a country where hardly 3% ppl invest in Equities , if we complicate investment procedure by suggestiing your way of investmets this number will only go down.

        I am preety sure all your readers who have agreed to your way of investing wil not be disciplined and will not invest as much amount as they were investing through sip in a years time previously !!

        Keeling

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    • Dear Mr. Swapnil,

      The strategy suggested by Mr. Rajshekhar does make a lot of sense, except that it might be hard for an extremely busy salaried person or for that matter a businessman to implement it to the T consistently over several years. That too, with technology in our hands it is not that difficult now. For such investors (which are the vast majority) an automated SIP would be very convenient.

      However, I would differ with you on your point that this strategy will not generate a substantial alpha over a long period of 15-20-25 years. In fact, if followed in letter and spirit, in my opinion, it will create a humongous alpha over such a long time over standard SIP. Food for thought!

      Great concept Mr. Rajshekhar!

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  7. Hello Rajshekhar Sir,
    Since when you started the blog a few months ago, saying “If you cannot fight the tide….” perhaps, it has been sheer amazing how regular and enriching your posts are!
    You certainly have an enviable depth of understanding, which expresses through your views every now and then….
    And even though I don’t wish to invest in mutual funds till I fall in highest tax bracket, atleast from your 3 portfolio strategy( debt, stocks, MF). I have come to appreciate the compounded role of debt( PF, PPF)

    Similarly. your focus advocating lumpsum investment in funds is very noteworthy, but I think it needs a lot of patience to keep lumpsum, amount in bank, than invest in SIP’s 😛

    Whatever, all I wanted to say is a big Thank You, for your excellent guidance.

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  8. Here I analysed inspired by your post:
    Fund: ICICI Pru Bluechip Reg – Growth
    Period: 1 Jan 11 to 28 Sep 2015
    Taken Each month’s low Nav. Invested 5000/- Per month at lowest nav of each month ( 57 installments)
    Invested amount: 285000.
    Corpus As of today 422232.
    If I would have invested 1st of each month then my corpus would have 408676.
    What will you say??

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    • I will say that you would be very lucky to have done the SIP on the first. The data does not really prove anything at all, it is the principle that is important.

      Also note that if the markets are rising in 1-2 months, I need not buy then, it is all a case of being patient.

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      • Rajshekhar Roy, if i have only 5000 each month for saving, i will have no option other than going by tradtional sip. This i think above example says. If i would have 2,85,000 as cash in hand i would go by lumpsum only. because this will give me best result over that period. Other than this, any exercise would be called adventures in investment rather than dull and boring investment.

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      • Ajeet that is not right. You have 60000 in a year and that can be used in any way through the year. Remove the mindset that it has to be invested every month. If this is not the right month to invest then why should you do so?

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  9. Rajshekhar Roy, if I put 4 month (20k) saving as lumpsum at a lowest nav of 4 month(next to impossible), i would be getting a corpous of 4,43,000. If i have a total 2,85,000 i will go with lumpsum to get a 4,99,000.
    So, in my opinion if i follow your method and put a lumpsum at a interval of 2-3 month i will get a amount anything between 4,08,000 and 4,43,000.

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  10. Sir,
    I was thinking to stop SIP from last 2 years and exactly for the same reasons that you have mentioned. But was not confident on the idea to move against the tide.
    Now I am not alone.
    I stopped all my SIP now and planned to put the same amount in shares of beaten down sectors (IT/pharma) month by month.
    Thank you for sharing your thoughts.

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