PERSONAL FINANCE MUSING 23 SYSTEMATIC INVESTMENT PLAN (SIP): THE MAGIC OF RUPEE COST AVERAGING

PERSONAL FINANCE MUSING 23

SYSTEMATIC INVESTMENT PLAN (SIP): THE MAGIC OF RUPEE COST AVERAGING

My book, “Musings of a (financially) illiterate father- a common investor’s guide to wealth creation and retention is scaling new heights every day besides generating a buzz and having great sales. The book is now available in e-format too on Kindle, Kobo, i-books, and Google.

I will urge you to continue to share this post too as my book has been specially written to teach the alchemy of wealth creation and retention to our children-they deserve to learn it. Please support this mission of financial literacy by reading and recommending this book. The link is given below.

https://www.amazon.in/Musings-Financially-Illiterate-Father-Investors/dp/1643247263?tag=googinhydr18418-21&tag=googinkenshoo-21&ascsubtag=2cd97bc1-4bb5-4954-8f55-6fbb7070d8b9

The book is also generating rave reviews even by financial experts. Mr. Nirmal Chand is a very senior and respected banker, currently at the senior position of “Regional Director”, in Reserve Bank of India (RBI). He is a post graduate from Punjab University, Chandigarh, an MBA and also a Certified Associate of the Indian Institute of Bankers (CAIIB). He joined RBI in 1986 and besides other assignments has also been an RBI Nominee Director of Indian Overseas Bank. It is but obvious that any work or book on finance which passes muster from his keen and astute eyes is bound to be valuable for a common investor. He gave his “Thumbs-Up” to the book with the following words.

“It was with a bit of trepidation that I started reading the book on finance by an Army executive. Normally, one would expect an Army man to write a book on war, extremism, armaments, etc. It was a pleasant surprise to peruse a scholarly attempt by the author in the field of finance. It was not only an educative reading but also a very interesting one.

The author, like many of us, has admitted to his failings in managing personal finances. However, his experience, in the form of this book would help many young people to better manage their personal finances. The era of assured money inflows in the form of pension after long years of service is almost coming to an end with the introduction of the New Pension Scheme of the Government of India. Apart from this, most of the jobs of the future shall be in the private sector or self-employment. Thus; the youth of today needs some lessons in managing personal finances.

The author has explained complicated financial concepts in a very simple language with a few anecdotes with which many young people would relate. I found the explanations for inflation, returns, compound interest and investment avenues very fresh and interesting. The book is an excellent attempt to cover a wide range of topics on personal finance. I believe it would be useful besides the learned ones, for even those people with little financial education.

The effort of Anand Saxena in penning such a useful book is commendable. I am sure this book would go a long way in filling a knowledge gap for, especially non-finance people. The youth of the country is surely going to identify with the protagonists of the book- Anshreya and HoneyCool, who teach so many lessons as the book unfolds.

I convey my best wishes to the author for the wonderful effort and wish a great success for the book.”

          It is humbling to get such glowing reviews by financial pundits- the book seems to have filled a critical gap in the personal finance field for a common investor. I will keep you updated through these posts.

          Most of the common investors like you and me don’t have lump sum amounts of money to invest and instead go through the route of monthly investing. In fact, even if one has lump sum amounts, it is still better to deploy it in the market, through monthly investments which are spread over 6 to 12 months. This is due to a wonderful and simple strategy called “Systematic Investment Plan (SIP), which turns out a winner in all market conditions. In the current post and the one which will follow next week, we will study SIP and another strategy which is apparently even better. I will hold the name of the second strategy this week for you to immerse yourself in SIPing this week.

          “Mutual Fund Insight”, a quality magazine from Value Research did a wonderful research on the subject of Systematic Investment Plan (SIP) in their issue of Jun 2017 which clearly brought out the fact that the only way not to suffer a loss and rather to have 100% positive returns in equity investments was by following the SIP route. I will give excerpts of the same study for our intelligent investor^[1].

·    One-year SIPs had a loss percentage (negative returns) in 22.5% cases. However, as the duration increased, the loss percentages dropped to 16.2% (two-year SIP), 9.8% (three-year SIP), 5.9% (four-year SIP,) and almost Zero i.e. 0.3% (ten-year SIP).

·        Short-term SIP, for one year, also had the worst roller coaster ride with returns ranging from +534% to negative 66%. The similar figures for a ten-year SIP were +51% and negative 8%.

·        Even if one had started investing at the market tops (the worst time for an equity investor) like in the years 2000 and 2007, by the fourth year of SIP, positive returns had kicked in for 100% of the investors. The message is thus loud and clear- if the investment horizon is less than 4-5 years, equities may be the wrong investment vehicle.

·        Careful fund selection, however, remains the key. If one had invested in a poorly performing fund, no amount of stretching the SIP would have helped. Hence, backing a losing horse is not a good strategy in equity investment.

Let us do a bit of Math to understand the magic of SIP. As a concept, it entails buying stocks at fixed intervals (normally monthly) with a fixed Rupee amount. As the market will keep going up and down (over which the investor has no control), the number of shares of stock purchased will be less in market high and more in down market conditions. However, the average cost per share at the end of the period will be lower than the average share prices during the period. The example below depicts a period of three years.    

 

PERIOD	INVESTMENT	PRICE OF SHARE	SHARES PURCHASED
1	Rs 10000	Rs 100	100
2	Rs 10000	Rs 75	133.33
3	Rs 10000	Rs 125	80
Total Cost	Rs 30000
Average Price		Rs 100
Total Shares Owned			313.33
Average Cost	Rs 95.74

Thus, we see that though the average price per share works out to be Rs 100 but the average cost to the investor works out to only Rs 95.74, a net gain of Rs 4.26 per share. However, as is evident, the magic will only work if the investor continues to deploy money towards SIP, through thick and thin, through good and bad market conditions.

An argument could be made that if the investor had purchased all the shares in the second year when they were available at the price of Rs 75, he would have had 400 Shares instead of 313.33. There are two counter-arguments. One that it is impossible to know in advance when the market will rise or fall and hence an investor who intends to time the market may keep on waiting and remain out of the market when shares are available on discount. Secondly, the opportunity cost of not deploying the first Rs 10000 in the market for one full year would have been lost. Market timing is a loser’s game which an average investor like you or me will find prohibitively costly to play.

In a study, Prof Nejat Seyhun studied 7802 trading days from 1963 to 1993 in U.S. Stock market and found that 95% of the market gains of these three decades happened in only 90 trading days- an average of three days in a year^[2]. How would one know in advance which are those three days of the year? The answer lies in remaining invested in the market round the year. SIP offers the easy solution. 

          And finally, the biggest positive of SIP investing is that it brings in a discipline in investing and takes emotions out of it. The ability to sock away a fixed amount month after month will invariably result in generous long-term returns due to the magic of compounding.

          Is SIP the panacea, the silver bullet to rid the investor of all the investing mistakes. Well, we will discuss next week, another methodology, which may turn out to be even superior to SIP, but unfortunately, not followed by common investors. Till then, hold your horses, mull over and start SIP in mutual funds today.

          My book (paperback) is currently available domestically on Amazon.in, Flipkart, Infibeam and Notion press, and internationally on Amazon.com and Amazon.co.uk. The e-Book version is available on Kindle, Kobo, i-books and Google Books.

          For now, enjoy your Sunday while reading my book- you have earned it.

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[1] Mutual Fund Insight, Jun 2017: Research covering period from 1992 to 2017.

[2] IFA.tv - The Documentary Film: Index Funds: The 12-Step Recovery Program for Active Investors.