Can I exit while doing Systematic Investment Plan (SIP)?

Systematic Investment Plan: Graduate to better investment style

Ever since the great rise and subsequent fall, the most striking feature of Indian market has been very high level of volatility that has made all investors, retail as well as institutional, look for cover at times when bets have fallen flat. Though this has been in lines with the business sentiments, the practical problem of identifying the right entry and exit points in market has indeed been one of the most crucial requirements of making money in Indian markets of late. This is where the efficacy of Systematic Investment Plan (SIP) becomes paramount. Lets see as to how this works and what are the pros and cons of SIP. Specially if you are a mutual fund investor, you need to be rather cautious of the timings as this impacts to a great extent, your returns.


Timing, the crux of making money.

Volatility is here to stay, and you have to cope with it if you are an investor. How? The best way to profit from volatility in the market is to predict the turning points correctly, and make the appropriate investment decision. In other words, buy at the bottom and sell at peaks! Do so consistently, and you will make lots of money. But this is a job next to impossible. A falling market (purely on the basis of valuations, the best time to invest) is inundated with negative news, which scares most investors. Likewise, there is an abundance of good news in a rising market (the best time to sell), as a result of which there is a tendency among investors to buy or at least hold on to their investments in the expectation of more gains. This means that investors usually tend to move with the mood of the market. As a result, they don鈥檛 take opportunities to pick bargains in a falling market and hold on to the best sells in a rising market. They even end up buying near peaks and exiting near bottoms, when they should actually be doing the opposite. Shouldn鈥檛 you take the guesswork out of timing the market, and consistently buy near the bottom? That is exactly what you do with SIPs, an investment option available on various mutual fund schemes (equity, debt and balanced). SIPs, are the most effective in the case of equity schemes, as equities are, by nature, the most volatile of asset classes.


Normally, while investing in mutual funds, usually, you buy into it at its prevailing NAV. With SIP, however, your investment is staggered. Instead of a lumpsum amount, you invest a pre-specified amount in a scheme at pre-specified intervals at the then prevailing NAV. SIPs are based on the concept of rupee cost averaging鈥揳n investment strategy common in the stock market. In the short term, share prices rise and fall in line with the broad market, often driven not by fundamental factors, but purely by sentiment. When share prices drop on account of negative sentiment, a bounce back is mostly a question of time. What this spike does is give you an opportunity to buy more of the same stock at a lower price, and lower your average cost price. This disciplined approach to investing helps long-term investors reap good returns over a period of time. And, in most cases, the average unit cost will always be less than the average sale price per unit, irrespective of whether the market is rising or falling. Only in a very pessimistic market, with prices falling continuously, a SIP investor suffers losses. SIPs work best over long periods of time. Only then do you capitalize on the periodic dips in the market and accumulate a greater number of units at lower levels鈥揳nd over time, reduce your average unit cost. Further, by staying invested for a long period of time, you profit from the appreciation the market tends to show over the long term.


Advantages of SIP

If you though that SIP is only for rupee cost averaging you are wrong. Let us see some more:


!. Avoiding the market predicting: Most investors cannot resist the urge to try to invest at a market low and take their profits at a market high. They usually fail because the task is extremely tough, even for experts.


2. Disciplined investing: Once you start with SIP, you invest at the appointed time and that makes you a disciplined investor. Further, SIP ensures you don鈥檛 divert your savings earmarked for investment purposes towards spending. By giving the cheques to your fund house in advance, the incentive to backtrack on your commitment is reduced. When it鈥檚 time to invest, you do so, regardless of what鈥檚 going on in the market. If you invested in a good scheme and are in it for the long haul, you shouldn鈥檛 anyway worry about your investments on a daily basis.


However, there are some of the disadvantages of SIP. SIP does not protect you from making a loss in constantly declining markets. If you have been investing in a falling market without saving a thought for the long-term trend, you might make losses. Second factor is that cost averaging is of no use if your portfolio is fundamentally not sound. So first one must identify the right portfolio and than think of price averaging.


Some practical factors to keep in mind

Ignore minor swings. A falling market will bring you in doubt as to whether to continue with an equity-linked SIP or not. Unless you feel the long-term outlook on your investment has turned negative, persist with your SIP. In fact, a downturn gives you the opportunity to buy a greater number of units, and brings down your average cost price. And when the market recovers, your gains will be magnified. Remember one of the original objectives for investing in SIP is that you don鈥檛 know how to time the market, and as such, you need to stick with it to get the full benefit.


Remember to monitor your investment periodically. In the final analysis, the success of the SIP you have invested in will depend on its corresponding scheme鈥檚 performance. And that is the factor you need to keep tabs on. Portfolio management is a dynamic function. Given that a fund manager has 6,000 stocks to choose from, stock selection can make or break a fund. In time, you might discover that your scheme isn鈥檛 delivering. Or you may find that your investment style has changed. If so, consider making an adjustment to your investment strategy. Also keep thinking over the character of your fund and try to assess whether it is indeed such character is appropriate for that time.


Decide on the periodicity of your investment. At present, mutual funds offer two options on SIPs鈥搈onthly and quarterly. Your choice should be based on the periodicity of your cash inflows and the time during which you can make good the indicated amount. Your status regarding the inflows and outflows of your investible resources should be extremely clear. However, traditional wisdom says that lesser the periodicity, the better, as at allows you to get more opportunities to benefit from favorable market swings. Further, longer you keep investing, the smoother the average cost graph.


Essential fact to consider is that SIP is a mode of investment timing and not of identifying the in

Sure, subject to whatever rules you agreed to when you signed on. Most just require that you notify them of your decision.

i dont think thats a good idea to exit, you can exit, but you will have to take some hit, i suggest you stay invested, they will allow you to change your sip amount unless you in lowest/top most slab.