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When should you start a Systematic Investment Plan (SIP) of a mutual fund (MF)?

You know that you want to start an SIP, but are not sure about the timing. Should you start it now, or should you wait for the market to correct? When is the right time to start an SIP? This article explains it all.

You know that a Systematic Investment Plan (SIP) is the best way to invest in a mutual fund (MF). (Check out “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away” to know why)

And you are all geared up – you have decided the sum to be invested every month, and have also zeroed in on the exact MF scheme in which you want to start the SIP.

(How much you invest should not be any random figure – it depends on the financial goals you want to achieve. To know this technique in detail, please read “Goal Based investing”)

But you are not sure about the timing – when should you start the SIP? Should you start it now, or should you wait for the market to correct a little? When exactly is the right time to start an SIP?

 

The answer

Let’s get the answer upfront – any time is a good time to start an SIP. There is no good or bad time – any time is fine.

Don’t delay starting an SIP – if possible, start your SIP today! Don’t wait for the market to go down.

Surprised? Well, don’t be!

 

The logic behind Systematic Investment Plan (SIP)

The whole purpose behind investing in MFs through SIP is to eliminate timing the market.

When you make a one-time investment in a mutual fund, you wait for the market to correct (so that the price of the units goes down). In effect, you wait for the market to hit the bottom, so that you can get the MF units at the cheapest net asset value (NAV). This is a losing battle – because no one knows when the market would bottom out!

An SIP is started to remove this element of timing from your investments. You invest a fixed sum every month, irrespective of the level of the stock market. And this way, you also benefit due to cost averaging. (Please read “Cost Averaging” to know about this in details)

You get lesser units when the equity market is up, but you get more units with the same investment amount when the market is down. Thus, due to cost averaging (also known as Rupee Cost Averaging), your average cost per MF unit goes down.

Bottomline: You invest without worrying about the level of the stock market, and reduce your average cost of acquisition due to the short term fluctuations in the market.

 

Why is any time a good time to start an SIP

Isn’t the answer obvious now? The very reason for starting an SIP is so that you can invest without worrying about the level of the stock market. So, why worry about the market level or the index level while starting the SIP?

As we saw, the main advantage of an SIP is cost averaging. So, irrespective of the time (or the level of the market) when you start your SIP, your average cost of acquisition would go down due to the SIP.

That’s why any time is a good time to start an SIP!

 

The caveat

Yes, any time is a good time to start an SIP. This is true for the Indian market, but it isn’t necessarily true for all markets. Let’s understand this.

All markets go through cycles – markets that go up eventually come down, and markets that go down eventually go up. However, the long-term direction of the stock market depends on the overall direction of the economy. If the economy is growing, the markets would go up in the long run. And if the economy is faring badly, the markets would trend down in the long term.

In a fast-growing economy like India, the long-term trend of the markets is “up”, as the Indian economy is flourishing.

Therefore, it doesn’t matter when you start the SIP. Even if the market corrects after you start your SIP, it would eventually move up, and you would soon get a price higher than your average cost of acquisition.

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