Salaried = SIP? Read this case study

Since I wrote about not following SIP about a year ago, I have had many discussions in the blog and in Facebook groups such as AIFW on the subject. A lot of people have tried to convince me why SIP is a right method, despite the concept being completely inadequate for equity as an asset class. I will not go into the arguments or counter arguments as it has been done and dusted as far as I am concerned – if you are interested go through the different posts in the blog. 

However, the other important point many point out is the availability of money to take advantage of the drops in the markets. The argument goes like this – ” It is all very well for you as you have enough money to spare. We get a salary every month and if we do not put the money in SIP, we will probably spend it.” Now, I find it difficult to understand why any person cannot show some self discipline, but that is unique to each person. I was quite happy to see that a reader of my blog asked me a more pertinent question – she wanted to know how she could invest in MF more productively. Having done SIP for 2 years and read my posts she could see that there was enough case to not do SIP in MF.

To give some basic background, this reader lives in Mumbai and works in the advertising industry. Her monthly take home is about 1.5 lacs and she was investing 40,000 per month through SIP in 5 Mutual fund schemes. Over 2015 and 2016, she could see that her nearly 10 lacs invested in these funds have not done greatly. She could also see that there were several times she could have put in money, had she not been doing SIP. Now apart from MF, she also wanted to do 1.5 lacs in PPF annually. Based on this data, I have given her some alternative plans which she can look at in 2017.

  • Firstly she needs to fix the index levels aligned to her funds at which she wants to make a purchase. For example, in Nifty the right level currently will be 8000 and below. This may happen in Jan/Feb and a couple of other times in the year.
  • In order to have the money available, avoid putting in the 1.5 lac in PPF in the beginning of April.
  • As and when markets fall put in the money for MF buying. Look at having 4-6 purchases in the year.
  • She could just keep the money in her savings account but there will be a temptation to spend and also the interest is low.
  • A better way will be to put 12500 per month in PPF, unless you are buying MF that month. If the markets are high you can put more. For example, if you are clear that April is unlikely to be a good month for buying MF, put that amount in PPF.
  • In general, put your SIP amount in an Arbitrage fund with dividend option. You will get decent returns and can shift money from it to buying MF whenever needed.
  • Another way will be to put the money in Liquid fund or some other type of debt fund.
  • The above addresses the issue of parking your money, so that you do not get tempted to spend it. At the same time, you do not buy equity MF at the wrong time.

How has it worked out for the reader in this month? 

  • She understands that a level of 8000 or lower in Nifty will be a good buy for her large cap fund but at 8250 etc she is not interested to buy.
  • She has put the amount of 40000 in a Liquid fund along with the amount of 30000 which she used to save for PPF.
  • In case Nifty consistently stays above 8000 till February beginning, she will put the money once again in the same Liquid fund.
  • At the beginning of each month have an idea of the Nifty level at which she wants to buy. It is all right if it does not reach that level, she will avoid buying.
  • Worst case scenario can be for Nifty to go up consistently through the year. This is unlikely and even in such a case she is anyway taking a monthly call.
  • I think it is very probable that she will buy her units at Nifty level of around 7900 this month itself or the next.

It is a rather simple system which anyone can adopt. Remember, her salary is not an issue here – people having lower or higher salaries just need to scale the model down or up. Do you want to do this? Only you can answer that – if you want your money to work in a more productive manner, consider it seriously.

A practical way to buy MF

It has been really quite heartening to see the responses to my last 3 posts where I wrote about how one should buy the different categories of MF schemes now. Many readers have understood by now that automated monthly SIP is not really the way to go ahead and buy MF schemes in our markets. However, they have also raised some issues about the alternative method and I wanted to address those in the current post.

Firstly, people are not clear as to how they should decide on the level of buying. In a falling market the temptation is always to keep waiting to get a better deal. The simplest way to do this is to understand that your goal is not to catch the bottom of the market – this is nearly impossible and doomed to failure. You are just trying to ensure some element of control on the buying price as opposed to a mechanical SIP. You would not buy a stock on a predetermined day of the month, irrespective of the price, so there is really no reason to buy MF the same way. The easiest way to buy will be to keep waiting till the indices make a turnaround for 2-3 days. Once they find support and it is seemingly on the way up you should buy. Again, understand that there is no guarantee that the support will not be a false one but, even then, you have done much better than SIP. A better way to buy will be following the DMA tracking which I have explained in my earlier posts.

Secondly. people have wanted to know what they should do if the markets have a sustained rise for the next 6-7 months. Now, this is quite unlikely for our markets that are linked not only to local news but also to global events. As FII buying determines the health of our markets to a great degree, there will definitely be days where significant downside is there. In the extreme case, if you do not have a buying opportunity in a few months, what have you lost? Remember, there is no need to buy every month or every quarter. You are much better off buying an MF unit at NAV of 15 Rs in January 2017 as opposed to buying it today at 16.5 Rs. Once you understand that markets will never go only upwards, you will be comfortable with the waiting. Your money is only benefiting with the wait.

Thirdly, people are unclear about what they will do with the money in question if they are not putting into SIP every month. Well, you can put it in liquid funds or just have it in your SB account. The important point is that the money should be available to you at short notice. You do not want to miss out on the MF buying opportunity when it arises.

Let me end by giving you a specific example of how this can be done:-

  • Let us say an investor wants to invest 12500 Rs in SSY every month, 7500 in PPF every month and also wants to do SIP of 30000 Rs each month in 3 MF schemes – a mid cap, a small cap and a large cap.
  • In a month where there is no opportunity in SIP buying he will put the money in SSY and PPF additionally. This can go on till 1.5 lacs in SSY and 90000 in PPF is exhausted for the year. Once this happens he can simply put the money in liquid fund if he is not buying MF units.
  • If, on the other hand, there is a great opportunity in MF buying in 2 successive months he will stop his PPF and SSY investment in those months and direct all his money towards buying equity MF.

I hope this is clear now and you will be able to use it well for speeding up your journey towards financial freedom.

 

How to buy small cap MF now

Many readers have written to me saying that they now understand why SIP is really not the right way to invest in equity. In my last post I had written about a possible method that could be used for buying mid cap funds. In this post I will extend the methodology to small cap funds.

For purposes of simplicity we will assume that the MF in question is a pure small cap fund. It does not really matter which one, you can very well go with any of the top 5 or any of the long standing funds. For those readers who always insist on names, look at DSP BR Micro cap fund, Franklin smaller companies or some similar fund. The other assumption we will make is that the NAV of the fund is aligned to the Nifty SML 100 index. Note that you can use some other index or even the fund NAV in question. The principle of the argument however remains the same.

Based on this let us look at how things currently are for the Nifty SML 100:-

  • 1 year and YTD returns on the Nifty SML 100 are 9.2% and 10.25% respectively. So your SIP investments in the small cap MF of your choice is giving decent returns to you.
  • The above means if you buy it today, as opposed to an investment in June 2015 or January 2016 you will be worse off. Understand that a SIP is buying units at progressively higher rates in 2016.
  • Current Nifty SML 100 level is higher than 30, 50, 150 and 200 DMA. This being the case it is a bad idea to buy units of your small cap MF now.
  • Your first buying point can be when Nifty mid 100 levels go lower than 50 DMA which is about 5303 for the Nifty SML 100. In simple terms it means that any SIP in small cap funds do not make sense unless the above happens.
  • 200 DMA for Nifty SML 100 is about 5173 and if the Nifty Mid 100 levels approach this figure it will be a great time to buy your small cap MF.
  • How do I know that Nifty SML 100 will go down by 500 points or 800 points? Well, neither I nor anyone else can say this definitively. However, the current uncertain global economic situation, food inflation not coming down, corporate earning still not getting robust growth etc almost guarantees that Nifty SML 100 will not go up in a linear direction. It may either be range bound with a range of 5600 – 6000 or there can be a deeper correction post Q1 results with it going down to 5000 or so.
  • Remember that a small cap index is necessarily more volatile as compared to a Nifty or Sensex, so a 800 point drop is not very difficult in the 2-3 month period.

In the above situation, readers can follow the small cap MF buying method that I have planned to use for the rest of 2016:-

  1. Stop all SIP in Small cap MF, SIP works in very few market situation and this is not one of those situations.
  2. Wait till July end to see the impact of Q1 results on Nifty SML 100. Put 25-40% of your 6 month investment if Nifty SML 100 goes to 5500 or below.
  3. Keep tracking Nifty SML 100 for any news based correction and check if it is moving towards 5000.
  4. In any case if Nifty SML 100 is below 200 DMA start putting more investment in small cap MF.
  5. You need to make a maximum of 4 purchases in these 6 months. Tracking Nifty DML 100 is quite easy, just check in MoneyControl for the DMA figures.

I hope this has given you a good idea as to how you can get this done. I will be happy to answer any queries or clarifications that you may need.

Your MF investments – strategic options

Several people have asked me over the last few months as to how I am so confident about the Nifty levels suffering major cuts. To be honest, it was really not that difficult to predict as almost all contributing factors were in the negative. My expectations that the Nifty will find support in between 7200 and 7500 have not held though and it now seems that 6800 or even lower levels are possible shortly.

As I said in the last post, your portfolio has been damaged quite a bit by the current cuts and recovery will be a long and painful process. If you are investing for specific financial goals linked to your MF portfolio, you need to assess the impact and estimate what should be your SIP amount now so that the goal can be reached on time with a fairly modest XIRR of not more than 12 %. In fact even this may be a difficult thing in the next few years.

Even before you go into the specific strategies for your MF portfolio, you need to look at the other 2 portfolios of stocks and debt. For those who do not have a stock portfolio, this will be a great time to start with one. You can read up some posts elsewhere in the blog as to how you can get started. Over a period of time this will be a great contributor to your wealth. As far as debt portfolio goes, people who do not have a reasonable amount of it will have realized the great value that it provides as a hedge as well as in ensuring that you do not have to sell your equity investments in the wrong time. Actively look at investments like the Tax free bonds. The so called experts who were sneering at these earlier may well be queuing up to but these now.

Coming down to the specific strategies in terms of your current MF portfolio and ongoing investments, here is what I think you should be doing:-

  • Your MF units are already down on NAV and if the market recovers they will increase in value. However, buying new units at progressively higher prices will only mean that your average acquisition price increases, which cannot be a good idea.
  • Given the current market levels, it is reasonable to assume that the markets will recover in the second half of 2016. As such buying through SIP does not make sense.
  • You can look at buying most of your MF investments between now and April/May.
  • In case you have some surplus money from bonus, arrears or variable pay it will make sense to invest more in MF at this juncture. That will average out your purchase price and make your recovery relatively faster.
  • It is in bad times that you get to see the true performance of a fund. If your fund is a laggard, be ruthless about it and shift to another one. The only thing that matters is how well it has weathered the downturn, do not be swayed by who is the fund manager or how many experts are asking you to stick to the fund.
  • Use this opportunity to get out of the SIP mode and start making logical choice on MF purchases some 4-6 times a year. It is far more effective than SIP.

As long as you are able to do the above in a sustained manner, the crisis can yet be turned into a possible opportunity in creating better investment options for yourself.

 

Your MF investments – understand the impact

I had wanted to follow up the post of yesterday by outlining some practical strategies that investors might follow in order to mitigate the risks associated with MF investments through SIP in a highly volatile market over years. However, on seeing a few posts in Facebook groups which are clearing misleading people, it seemed to me that it will be worthwhile to spend some time in giving a concrete example.

Before I do that, let me state the surmise of the arguments presented by people who want others to continue doing SIP as if nothing has happened. Firstly, it is said that over the long term the market volatility will cease to matter. For example, if you look at an MF performance for the last 20 years or so, this can be demonstrated. As an academic exercise this is intellectually flawed as it takes only one set of data point available for the Indian markets. As a practical advise, it is useless for doing the same thing when situations have changed dramatically, without any reassessment of the situation, is hopelessly inadequate. Secondly, the crux of the argument is equities are still the best bet, even if the XIRR of your investments done through SIP is in deep red. This seems completely lopsided to me. Simple reason is this – money does not have a different class based on the asset class it is invested in, you need to base your investment decisions on a clear basis of asset class relative returns, not on some romantic notions propounded by blog writers.

So let me take an example in the real world to show you how there is an impact. We will take a situation where a person starts investing in 2008, so that his money has had the best chance to grow through SIP. The following is the example background:-

  • In 2008 Ravi wanted to invest in MF through SIP for his son Ajay who was 3 years old at that time. Ravi estimated he would need the money in 15 years, which was sufficiently long term for equity returns to do well.
  • Estimated costs in 2008 for an Engineering course in a private college was 5 lacs. Ravi took 12 % educational inflation and arrived at a cost of 27.36 lacs in 2023, when he would need the money for Ajay.
  • His planner told him that with a 12 % XIRR, he would need to invest 5478 Rs per month in order to reach his goal.
  • Ravi started his investment in mid 2008 by doing an SIP of 5500 Rs in a popular diversified equity fund, which seemingly had the least volatility when compared to it’s peers.

Most of us know what happened to the markets from 2008 till today so I will not get into details regarding those. For much of the time Ravi had concerns about getting a 12 % XIRR but his worries were allayed greatly in 2014 when the spectacular rise in the markets made him think that he will achieve his targets 2-3 years earlier.

Cut to the present – let us see how things stand now and how will it affect the future. 

  • From 2008 till now, the XIRR of his fund has been a mere 7 % and this may actually get worse in the coming months.
  • His investment value is currently pegged at 6.52 lacs, assuming 71/2 years of investment time.
  • If we take his son’s age to be 10 1/2 years now and start with a base figure of 6.52 lacs, how much will Ravi need to invest if he has to reach the goal of 27.36 lacs in the next 7 1/2 years?
  • If Ravi still assumes a growth of 12 % his monthly SIP will be 8362 Rs.
  • If he is more conservative now and wants to take 10 % XIRR for the current value growth and future SIP then he will need to put in 10538 Rs every month.

This is the impact in real financial terms, never mind what people tell you otherwise. You need to do this exercise for yourself in order to understand how you have been impacted and how your investment needs to change in future for achieving your goals.

In the next post I will get back to what can possibly be done for existing investors.

Lies, damned lies and statistics of MF returns

I am sure many of you have heard this phrase or read about it. It was made popular by the great American author Mark Twain, who attributed it to the British PM Benjamin Disraeli. In simple terms it means that some people, when not having any real strength in their arguments, want to throw around a lot of numbers, mostly irrelevant, to confuse the issue.

Why am I using this particular quote? Well, over the last few weeks as the market is going into a tailspin, I have seen a number of people who have come out and made a series of logically flawed statements. These are now making the rounds in Facebook groups and self proclaimed expert writings. While I generally go by the “live and let live” principle in life, this is going to affect a lot of gullible investors who have blind faith in what they read, from certain sources. But let us first look at some of the statements:-

  • Even though the index is static for 2 years, MF SIP have given XIRR returns of 12 % in the same period.
  • Do not worry about market levels, just continue doing SIP.
  • Even if your SIP investments are in the red, they will be fine in the long term as long as you are holding them for 15 years or more.

Let us first understand one simple thing. The Sensex consists of 30 stocks and if you had a MF which invested only in these funds, then the MF returns will certainly mirror that of the Sensex. The fact that a particular MF is doing better than Sensex, just means that the fund invests in other stocks. Comparing the two is probably the silliest thing that you can do for obvious reasons. In fact, some of the mid cap and small cap funds have done quite well in 2015 too. The basic stuff one needs to understand is this – an index represents the general mood and valuation of the market BUT it does not mean that all stocks are doing badly. Even within the Sensex there will be stocks that will buck the trend and there are a whole lot of companies that are not part of the popular index. Of course, if there is a prolonged sell off in a bear market then all stocks will probably be affected to some extent or the other. This is what happened in 2008, 2011 and may yet happen in 2016.

So the simple point is this – if you have a portfolio of stocks which are doing well over a period of time, then that portfolio will have decent returns. It does not matter if the portfolio is an index, an MF portfolio through a fund manager, or a portfolio that you have created on your own. To give an exalted status to MF, virtually saying that MF will necessarily give positive returns irrespective of what happens to the Indices, is a clear example of using data in a devious manner. In my book it is definitely a lie.

Let us now look at what happens to your portfolio value when the market tanks. Well, if you are looking at a long term portfolio then any sharp drop in the market will affect it in an adverse manner. Now let us take an example where an investor had 50 lacs in December 2015 and is also investing 50,000 per month. If the market continues to go down over the year 2016, then his portfolio will definitely be affected adversely. Let us say that the benchmark indices drop by 20 % in this year. As all fund managers are great one’s the portfolio value only drops by 10 %. The investor will hopefully get to buy his new units at a lower NAV through SIP but there is no guarantee of it as the market will not be going down linearly. SIP on a specific day of the month will most likely NOT help to buy at best levels. I have discussed this a lot in some of my earlier posts. In the balance, the investor is going to be poorly off on both scores of his earlier portfolio as well as his new investments.

You need proof of this? Look at your own data between January 2014 and January 2015. What is the XIRR that you have got on large cap funds? What was your portfolio value in January 2014 and how much is it for THAT portfolio today? Remember do not be deceived by looking at your TOTAL portfolio value, which would of course be more due to the investments you made in 2015.

What really bugs me is some people like planners and MF industry people knowingly try to create a hype that MF investments are less risky as compared to direct stocks and they will kind of do well, despite the markets doing badly. It is like saying all our batsmen will fail against Australia in an innings but we will still score enough runs !! And in cricket at least you cannot score negative runs !!

What about equity investment for the long term? Will your portfolio recover and grow hugely in the long run? It may well do that, but it does not take away the fact that the depletion of value in your portfolio is real. A 50 lac portfolio going down to 40 lacs does mean that your assets and net worth have reduced by 10 lacs. That fact cannot be wished away and will impact you badly. Of course, if you panic and sell off then you have just converted a notional loss into a real loss for your portfolio. Further, there is really no saying how the market will react in the future. What you need to remember is that for all projection of past data, no one has enough ability to project what will happen 15 years into the future.

These then are the lies, damned lies and statistics propagated by people who somehow want people to just keep investing in MF through SIP which really may not be a best idea in a fluctuating market we are likely to have in 2016. Does this mean I am saying that you should not invest in direct stocks or MF? Not at all – equity is a great asset class to be in, but do it with open eyes and understanding. MF is a simple instrument that is buying stocks with your money, it has no magical quality apart from the scale in which it is doing the transaction.

Equity investments are in a nascent stage in India and we all need to support it’s growth for retail investors. But we need to do it through objective advise that will really educate new investors, not though the current methods adopted solely for vested commercial interests or lack of knowledge.

MF buying in 2015 – Mid & Small cap funds

As most of the discussions on the new mode of MF purchase has been centered around the Nifty and Large cap funds, one would have got the impression that SIP mode in general would not have worked in 2015. That is however, not quite true. The Mid cap and Small cap funds fared much better than Large cap funds this year, even with SIP. This has generally been the case over the last few years too, if you look at the data.

Let us look at some data for the Nifty Mid cap 100 index which closed at a value of 13190 on last Friday. 

  • YTD returns and 1 year returns are at 5.04% and 3.60% respectively.
  • 1 week and 1 month returns are pretty much break even, marginally negative.
  • 52 week high and low have a spread of nearly 3000 points.
  • The 30, 50, 150 and 200 DMA all range between 13129 and 13165. Note that all are below current level but not by much.
  • If you had done SIP in a Mid cap fund through 2015 you will be seeing some reasonable gains as most actively managed funds will give better returns as compared to the index.
  • However, the fact remains, you would necessarily have done better if you were tuned into the buying opportunities that presented themselves in 2015.

Even though the current index level is below the DMA values, I will not be in a hurry to invest in Mid cap funds right now. There is a clear possibility for the index level as well as DMA values to recede further going into late December and first half of January.

Let us look at some data for the Nifty Small 100 index which closed at a value of 5474 on last Friday. 

  • YTD returns and 1 year returns are at 4.22% and 2.40% respectively.
  • 1 week return is marginally negative. 1 month is 2.20%.
  • 52 week high and low have a spread of nearly 1500 points.
  • The 30, 50, 150 and 200 DMA all range between 5381 and 5470. Note that all are below current level but not by much.
  • If you had done SIP in a Small cap fund through 2015 you will be seeing some reasonable gains as most actively managed funds will give better returns as compared to the index.
  • However, the fact remains, you would necessarily have done better if you were tuned into the buying opportunities that presented themselves in 2015.

Even though the current index level is below the DMA values, I will not be in a hurry to invest in Small cap funds right now. There is a clear possibility for the index level as well as DMA values to recede further going into late December and first half of January.

How have my own funds done in 2015? Well HDFC Mid cap opportunities and DSP BR Micro cap fund are the two that I have in these categories and they have actually done reasonably well. However, I could have done significantly better in this year through my revised buying strategy.

Take a look at how your funds in these categories have done. For all the volatility that we talk about so relentlessly, it is these categories of funds that have given the best returns in this and the past few years.

 

Your MF buying plan to replace SIP

I am happy to note both the readership and the reactions to my last post on how I planned to buy my large cap oriented MF now. As some of you have rightly pointed out the general framework of investing can be tried out for other categories of funds too, of course the relevant indices would be different. Also, it is possible to track the Mutual fund NAV itself instead of index levels but that data is not easily available. Maybe some reader can try to make a calculator that outputs such information readily. The method will definitely be better if you have information about 200 DMA for the relevant MF NAV etc.

Now many people have got back to me and said that even though at a logical level my plan makes sense there are a few serious issues if they try to implement it. Let us first outline those issues before I respond to them:-

  1. What will happen if the market keeps going up as in a bull run – does it mean we do not buy MF at all?
  2. You want to buy at a particular level, but the markets may go down more.
  3. I may not have 20 % of my planned investment with me when it is time to buy the MF based on your suggestion.

For starters, I think it is very unlikely that we will have a multi-year bull run any time soon. But, even if we do, it does not mean that you will not be buying MF through this method. You need to understand that in a bull run too, there are often corrections and some of them are rather deep. In such situations the 50 DMA and 30 DMA will keep declining and you can buy when the difference between these and market levels is minimal. Of course if the correction is such that the current market level goes below the 30 DMA then it will be ideal.

The second issue is that you must fix a level at which you want to buy. However, this is not sacrosanct and you will evaluate the market situation before you actually buy. For example, I want to buy my large cap MF when Nifty reaches 7800. Now, if I see the Nifty falling rapidly due to some adverse sentiments related to the Fed rate hike in the US, I will obviously wait for a couple of days to see where things go. You always need to have an idea of a level at which you want to buy ( or sell ) in the markets but you decide on the actual transaction based on the ground situation.

The third issue is the availability of money to buy the required units at the right time. There are no easy answers to this but one simple way can be to have a slightly inflated Emergency fund. Of course, you must remember to replenish it as quickly as you can, preferably on the next pay day.

Now that we have addressed all these issues, let me give you an investment approach that I follow myself and recommend to others. You need to understand it completely and implement fully if you are interested, half measures will not do.

  • 3 portfolios Debt, MF and Stocks are all you have.
  • Decide on your overall annual investment and their break-up. For example you can say 3 lacs of Debt ( PF and PPF equally), 3 lacs of MF and 1 lac of stocks. This is just an example.
  • In the starting months if you are not investing in MF due to market levels not being appropriate, invest in PPF or stocks.
  • Once you run out of PPF amount of 1.5 lacs and stocks of 1 lac then keep the money in Liquid funds or just let it be in SB account.

At the end of the day you need to decide how you will invest for yourself. If you still think that standard SIP with the same amount being put on the same date every month, irrespective of the market levels is really the way you want to go about things, then you should do so. It is important to feel comfortable about what you do.

You just need to make sure that your comfort is not based on the fact that you do not know a better way – well, now you do.

Mutual fund buying – A follow up post

Well I was expecting a fair bit of response on my post of yesterday and it has happened along expected lines. A lot of readers could appreciate the fundamental logic behind my method and some wanted to follow it too. At the same time a few wanted me to explain with some example from earlier and also be clearer about how exactly the method will work. As a blogger, readers are the reason for why I write a post, so let me try and discuss more elaborately.

Let us take the example of ICICI Focused Blue Chip Fund and assume that we are using Nifty as the benchmark index for it. Now, if you look at some basic data of this fund for the direct plan of this fund for the past year, you’ll observe the following:-

  • 1 year return of this fund is 2.54 % while that of Nifty is in the negative zone. So as expected of an actively managed fund, it has done better than the index.
  • However, in this period the Nifty was fluctuating between levels of 7500 and 9000. If you look at the NAV of the fund over this period you will see that it has tracked the Nifty quite closely.
  • In this one year the CNX Nifty had levels of 8000 or lower on several days. Obviously the NAV of the fund would have been a low one on those days. 
  • The whole idea about my buying MF is based on tracking these possible lows and buying on those days.

Now many will say that this is in hindsight and what if Nifty had an unidirectional up-move? Well, this can happen but in that case you are anyway buying MF units at high NAV as far as standard SIP is concerned. Now, if you free yourself from the constraint of having to invest in every month the scenario changes rather dramatically. You have the money to invest, you can afford to wait till the market drops.

How do I know the market will drop? That is where you need some knowledge of the market and the business environment to take a call. However, it is really not practical that in our current environment the market will only move up. While the 200 DMA for CNX Nifty is going down, you can afford to wait and not buy. Use this tool which is easy to track – once the trend reverses go ahead and buy. Whether you want to buy at one go for the year or not is something you need to decide, even though I will not recommend that. For my own investment I think 4-6 purchases in a year will be the ideal figure.

OK, so for someone starting to invest in this fund today, what is really the outlook for the next one year by using the method that I have advocated? I definitely think there will be buying opportunities in the next 2-3 months. The next downtrend can be after the budget. Finally a poor monsoon and elections in the states will most probably result in another opportunity.

In summary, I plan to track the 200 DMA for Nifty closely and hope to invest 4 -6 times, most probably in December 2015, January 2016, July 2016 and September 2016. Of course, these can change if unexpected things happen such as the BJP winning the elections in West Bengal – highly improbable. In any event though my returns from these investments both short and long term is bound to be better that what my SIP returns from this fund has been in the past year.

I hope I have been able to convince you to try this out and check what happens for a year.

SIP – perception exceeds reality by far

I had written a post earlier on how SIP had evolved in India and how it gained in strength post the 2008 crash in the markets. In the last week, when I wrote a few more posts on it questioning the effectiveness of this as a mechanism of investment, I could see from the vehement reactions of many people that it is indeed very firmly entrenched in the psyche of different kinds of people. In that sense it really has been a wonderful marketing success, even though not all investors may have benefited from it in the manner they would have expected to.

Do not get me wrong here. I do believe that for someone who is not investing in equity at all, SIP in MF can be a great starting point. It helps you in instilling a habit of regular and disciplined investment and is a good way of seeing that you are getting progressively closer to your goals. Unfortunately, that is really as much there is to the standard SIP. The problem, as I have explained in my earlier post, is that the current way of SIP investing is clearly unsuited for buying equity. So, while you may well make money in your SIP, the real issue is that you could so easily have done a lot better. People will try to convince you otherwise with a plethora of data and calculations but, think through it yourself and look at the MF NAV over the last 2-3 months, you will easily understand what I am saying.

Now who are the people who have been endorsing SIP from the rooftops and why have they been doing so? Well, different categories of people have different motivations, so let us take a look at each one of them.

To start with there are the Fund houses and the MF distributors. The motivation of these people is not difficult to understand. The toughest aspect of any business today is acquiring customers – if you get a customer to sign up for a 5 year SIP you are doing rather well for yourself. For the MF distributors, it is a source of recurring commission to them as long as the customer keeps the SIP active.

Why are the financial advisers and several bloggers excitedly promoting SIP? Well, for one it is a rather simple concept, easy to explain and understand. Also, for people who have never invested in stocks, starting with MF and something like SIP is simpler. Many of these people also get caught into thinking that they are actually into a very good thing. The zeal with which SIP is defended actually tells you that many people genuinely feel it is a great concept.

Finally, why are the customers so deeply entrenched. Well firstly, there is the endowment effect. You are new to equity when you start SIP and returns of 12 – 15 % over the last 3-4 years when all that you have been used to are 8-9 % debt returns seem really wonderful. You want to support it as you feel it is a great deal, you want your friends and relatives to get a benefit from this wonderful thing too. You keep reading everywhere how great a concept SIP is and so on. When the markets are going up, your adviser tells you that your portfolio is having a bonanza, even if you are paying a higher amount for your units. When the markets go down, he says that you are now having the great advantage of buying your units at a bargain price and surely all Indians love a good bargain?

Like in the larger world the rich only get richer and the largest borrowers from banks get even larger loans, so in the world of investment something successful gets even more investors flocking to it. This has happened for PPF, ULIP, several LIC policies, Tax free bonds and also to the MF investments through SIP. So much so that many end investors who invest through their brokers do not really even know what exactly they are investing in – many have actually told me that they invest in SIP and that it is hugely superior to stocks as their broker has told them so.

Again, despite the efforts of SEBI against wrong selling, without making the customer aware of what he is getting into is rampant in our country. Many customers are told that SIP is quite similar to the debt products over the long term of 10-15 years, only the rate of return you get is much higher than the debt products people normally invest in. I mean, isn’t this downright wrong selling, never mind the fact that the investor should really not be so gullible.

My conclusion is that SIP is a good mechanism if one uses it in an intelligent manner and not be constrained by the common method of investing the same amount on the same day every month. However, a lot of people are being drawn into it without the full picture and that is never a good thing, even if some investors may yet hopefully do well out of it. As for the smarter investors the standard SIP is a clear no-no. You can do a whole lot better with your money – I will explain how in the next post.