I would like to illlustrate with my own personal experience how systematic investment plan helped me. In November 2007 I wanted to make an investment in mutual funds for tax saving purpose and also because that was the time when stocks were very popular because of the crazy bull run. Now I would have had two choices, either invest, let say 1.2 lacs lumpsome in the stock market. or invest 10K every month (which means choose SIP). I chose the systematic investment plan. And I am very glad about that decision. Because the markets have fallen about 40% since then. Had i put all my money in stock market in that month itself, my losses would have been comparable to 40%. But now, although I am still in the negative terrain, my losses are less than half of what they would have been. because i kept putting money every month. I also put money when nifty touched 3700, the current bottom and that part of the investment is currently in the profitable region and hence my losses have been reduced.
You may think that it would have then be better to 'time the market' and put the money when nifty was around 3700. There are two problems with this. First i recall a friends experience where he did try to time the market and put money after the january drop, when nifty dropped from 5600 to around 4800 or something like that. But when he invested, the market kept droppping further. Even say I would have put the money with nifty @ 3700, how do i know nifty wont drop further ? Infact in all probability i think it is going to make a new bottom in the coming year. Who knows?
Thus in conclusion, if you want to reduce the risk you better choose SIP over lumpsome investment in mutual funds. Another advantage is that for most people it is easier to arrange or save money on a monthly basis rather than doing a bulk saving.
Related posts :
- Introduction to Mutual Funds
- Tips for selecting a mutual fund
- This is not a good time to invest in mutual funds
- Liquid Funds : What, Why, How, etc.