This article emphasizes the fact that SIPs give superior returns compared to lump-sum investment. It also talks about various investing options available for SIPs (like Micro SIP), along with their characteristics and possible limitations. It advises you about the strategy to be followed for SIP investment.<\/p>\n
(The article has been inspired by a question from the reader \u201crikinj\u201d)
\n<\/p>\n
(Have you read the earlier article on SIPs? Go ahead and read “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away<\/span><\/strong><\/a>“)<\/p>\n <\/p>\n A question that is asked very often is: Don\u2019t one-time, lump-sum investments give better returns than SIPs?<\/p>\n And the answer is, yes, most definitely.<\/p>\n Shocked? Well, don\u2019t be. Because that “yes” comes with a big disclaimer<\/em><\/strong>: A lump sum investment can earn you the best return if it is timed right.<\/p>\n This means that it has to be timed right twice: For the purchase, and<\/em><\/strong> for the sale. If you are able to buy at the very bottom, and<\/em><\/strong> if you are able to sell at the very top of the price movement, you can make the best return.<\/p>\n The obvious question is: Can you time it right, twice, all the time?<\/p>\n The answer is: No. And the answer is “no” not just for small investors like you and me, but also for professional investors.<\/p>\n One can time the market maybe once or twice, but that would be just coincidence. There is no way anyone can consistently<\/em> time the market<\/strong>. Because no one can know for sure if the bottom has been reached, or if the top has been achieved.<\/p>\n And therefore, although theoretically<\/em><\/strong> it is possible to earn superior returns by making one-time, lump-sum investments, practically<\/em><\/strong>, a systematic investment plan is the best available option.<\/p>\n Want to know why? Please read “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away<\/span><\/strong><\/a>“.<\/p>\n Now remember, analysis done by looking into the rear view mirror can draw different conclusions. Let me explain.<\/p>\n If you look at the historic data, and see the return given by a stock or a mutual fund (MF) scheme between its bottom and its top, it would always<\/em><\/strong> be more than the return given by an SIP in the same period.<\/p>\n (And that\u2019s why I said that theoretically, it is possible to earn superior return by making one-time, lump-sum investments)<\/p>\n But the important point to remember is that when analyzing historic data, you know where the bottom and top were. But while buying or selling in real time, you don\u2019t know how the price would shape up in the future.<\/p>\n And therefore, practically speaking, an SIP is the best option available for long term investors<\/em><\/strong>.<\/p>\n <\/p>\n Ok, now that we are clear that SIP is the way to go, let\u2019s understand the various options available for SIP investments.<\/p>\n I would broadly classify SIPs into two classes: Regular SIP, and Micro SIP.<\/p>\n These are the traditional SIPs as we know them. Following are their characteristics:<\/p>\n These are the new breed of SIPs, which cater specifically to people who want to divert their savings, very small in amount, into mutual funds (and therefore into the stock markets). Following are their characteristics:<\/p>\n Ok, so we see that there are many limitations for a micro SIP. But are they necessarily bad?<\/p>\n In my opinion, they aren\u2019t \u2013 because most of the limitations just make you invest in the MF scheme for the long term. And that\u2019s how investments in equity mutual funds should be! (To know more, please read “Stocks – The winning bet for the long term<\/span><\/strong><\/a>“)<\/p>\n It is no different from a recurring deposit<\/strong> in a bank, which forces you to make small, monthly payments for a pre-determined period of time, and which has a penalty for withdrawing before time.<\/p>\n The only difference is that the micro SIP would give returns that can far surpass returns given by a recurring deposit!<\/p>\nWhy a Systematic Investment Plan (SIP) is better than a Lump-Sum investment<\/h2>\n
Options available for investing in a Systematic Investment Plan (SIP)<\/h2>\n
Regular SIP<\/h3>\n
\n
Micro SIP<\/h3>\n
\n