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.