Khota Paisa

SIP – The Silver Bullet?

Posted in Investment by khotapaisa on January 25, 2010

Today I was watching a program on a leading financial news channel. A viewer called up and asked his investment query to the guest expert. The viewer had 5 lakhs (if remember correctly) for investment. He had a time horizon of 5 years after which he needed 15 lakhs towards his father’s medical needs. He wanted to take low risk so as to keep the principal investment amount safe. He wanted to know how to invest the money. The guest expert advised the viewer to start a SIP/STP in equity funds (I guess in HDFC Top 200, Reliance growth & SBI contra). He also suggested that at a reasonable 15%, he won’t have 15 lakhs after 5 years. So, either the viewer needed to increase time-horizon or take more risk.

This forced me to think about the common misuse of the systematic investment plan(SIP). Nowadays, SIP is being used as a silver bullet. No matter what your financial needs & profile, you will by default be suggested to invest in equity thru SIP. In reality, SIP has no magical properties. It doesn’t make your equity investment safe. In the example above, given the investor need and time horizon, equity is not exactly what the investor needs – SIP or no SIP. For a 5 year horizon, equity is avoidable for safety seeking investors. In this case, equity becomes less suitable given the purpose of investment. These days SIP is being offered as a equity-with-no-risk (what else would you ask for) investment option. This is another worrying trend like the ULIP trend. Remember, there is no one financial products that fits all. And this applies to SIP as well. The fact that you are going to invest thru SIP should not have any effect on your decision to invest in equity. You should first decide whether you can/want to invest in equity. Once you have decided to invest in equity then you decide whether to go SIP or no-SIP way.


6 Responses

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  1. Vishwas Gupta said, on February 7, 2010 at 10:33 am

    I agree that these days SIP is a golden word. Every financial expert suggests investments in equity in diversified funds using SIP mode. However, SIP can not be a answer of every financial goal, like you mentioned that if the goal is strictly 5 years away, equity may not be the best class.

    I have one question as well:

    If one can has surplus of say Rs. 25000 per month, which is a better investment:

    a) Buy a home with home loan EMI of Rs. 25000
    b) Invest in equity diversified mutual funds via SIP route

    Assumption is that one is residing in his own house and the home loan in point (a) is taken as investment rather than for living purposes.

    It would be great if you can provide your thoughts with some mathematical model e.g. the value of the house say after 15/20 years.

    • khotapaisa said, on February 7, 2010 at 1:24 pm

      Hi Vishwas,
      The question you asked is a very pertinent one. In fact, it has given me the topic for a post. As for your question, a house for investment purpose may make sense depending on various factors like cost of house, rent, maintenance etc. I would try to post a calculator to calculate the same. If you do decide to buy house, make sure that you satisfy the following criteria as well.
      – At least 20% in down payment
      – Total EMI should not be more than 30% of your in-hand income.
      – You are already investing towards more important goals like retirement, child education etc.

  2. Srikanth Matrubai said, on April 16, 2010 at 6:07 pm

    True SIP is the NOT the one plan fit for all solution., but there is no other asset class which gives you returns like the equity and no other instrument which is cheaper than Mutual Fund.
    Mutual fund are cheaper, more transparent and more liquid than ULIPs.

  3. simranjit singh said, on May 28, 2010 at 2:20 am

    hello sir,,
    i juss check ur webpage. i m very impress wid dis. sir i am a small inveseter. i want to invest 5,000 to 10,000 per year in sip plans for 5 to 7 year. can u tell me in which mf i can invest.
    simranjit singh from ludhiana

    • khotapaisa said, on May 29, 2010 at 9:23 am

      Hi Simranjit,
      It difficult to suggest anything without details about other investments in funds. If you don’t have any other SIP etc in funds, you can start a monthly SIP in diversified equity fund. Look for a fund that is more consistent in return rather than going for highest return fund.

  4. Lokesh Gupta said, on December 20, 2010 at 5:49 pm

    I and following your blog NPS and on your advice have opened a NPS account. I have discussed with you about my MF portfolio wherein i have 5 equity MFs like Reliance growth fund, Birla sunlife front line equity, DSB top 100, hdfc top 200.
    I am investing 3000/month in each of these through SIP.
    I check the NAVs regularly and am scared sometimes when the NAV in down and i am actually in a loss.
    Just wanted to check if these UPs and downs are regular in MFS and i should stay with these funds. I am new to MFs so gets a little scared.
    Pls advice.

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