SIP how it works for ME?
Being enveloped with downbeat global economic news, Indian equity markets have corrected by good -12.8% in the present quarter (i.e. from July 1, 2011 to September 22, 2011) and 22.1% since the last high 21,004.96 – made on the November 5, 2011 (the Muhurat Trading Day). The backdrop of following global economic events has literally sends shivers down the spine of several investors – both in Developed Markets (DMs) as well as Emerging Markets (EMs).
- Debt overhang situation in the Euro zone
- Downgrade of Greece’s sovereign rating from “Caa1” to “Ca” by Moody’s
- Downgrade of Italy’s sovereign rating from "A+/A-1+" to "A/A-1".
- Downgrade of U.S. sovereign rating from ‘AAA’ to ‘AA+’ with a negative outlook [due to increase in debt-ceiling limit to U.S $16.4 trillion, in midst of dismal economic growth rate (last quarter i.e. April 2011 to June 2011, GDP growth rate was mere 1.00%) and rising unemployment rate (9.1% in August 2011)].
- Accentuating inflationary pressures in the Emerging Market Economies (EMEs), including India
But rather than pressing the panic button and following the herd mentality; if we look at India specific economic dynamics, realisation would dawn that the GDP growth rate offered by India is far more appealing than in DMs.
Health of India’s economy
Yes, we have contracted to 7.7% in Q1FY2011-12 as RBI’s has maintained its anti-inflationary stance (of increasing policy rates) to tame inflation. But, the stance followed by RBI are indeed needed when most EMs are facing the brunt of rising in commodity prices. Corporate Advance tax numbers even though they have dwindled to 9.9% in Q2 FY2011-12 as against 19.0% in Q1FY2011-12 (due to brunt of rising interest rates), the long-term corporate earnings for companies with good management look fairly sustainable – especially if we consider the strong consumption theme and well-regulated banking and financial services sector. Moreover, going forward if FDI is encouraged (by building suitable infrastructure), it would further provide thrust to India’s economic progress. We believe that an economic growth rate of over 6.0%-6.5% (on an average) is good to attract foreign flows.
As far as the depreciation in the Indian rupee is concerned, it would be a short-term phenomenon given low confidence. The U.S. Dollar would depreciate going forward given the economic problems heaping there along with near to zero interest rate regime prevailing there.
What should investors do?
Hence taking a holistic view of the aforementioned global and domestic economic factors we encourage you investors to participate in the Indian equity markets, and avail of the present reasonable valuations. However, since we may see the aforementioned global economic headwinds unfolding, staggering your investments would be an appropriate approach. We recommend that you invest in diversified equity funds as this will help reduce risk (however one needs to stay away from U.S. or Euro oriented offshore funds in such a scenario). You may get defensive and invest in value style funds (as fund managers may perceive good value buying in these corrective phases on the equity markets) and also large cap funds. It would be prudent to opt for the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding.
Remember, while investing select only those equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
Safeguarding aganst, the downbeat economic factors gold is likely to be bolder going forward. As long as worries of soverign debt crisis prevail, gold would continue its north-bound journey. Moreover, the precious yellow metal would act as an hedge against rising cost of living as well. At Personal FN, we recommend that you should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.
We all know the answer to the following very simple question buts let's start with the basics anyway, to get a better comparison between an SIP and a VIP:
What is an SIP?
An SIP, or a Systematic Investment Plan, is a mode of investment whereby you, the investor, invest a pre determined amount on a monthly basis, on a pre determined date, into a particular mutual fund scheme. It's the most commonly chosen method of investing by retail investors today.
An SIP has a number of benefits, such as:
· Benefit of Rupee Cost Averaging
Since you're buying every month, you'll be buying at dips and rises, so you are averaging your cost over the time period.
· Benefit of Power of Compounding
An SIP of Rs. 5,000 per month, with the help of the power of compounding, can grow to Rs. 13.76 lakhs assuming a growth rate of 15% p.a.
· Helps you avoid panic selling
SIP investors tend to scare less easily than lump sum investors when the markets fall – as they get the chance to buy low, and later when they want, sell high.
· It's possible to start small
You don't need a large amount of money to start an SIP, you can start with as little as Rs. 500 per month and slowly build up your wealth.
· Helps you avoid market timing
An SIP effectively stops you from trying to time the market and inculcates automatic financial discipline into your investing method.
· One Form, Multiple Regular Investments
An SIP cuts down the paperwork you need to do, with one form you can invest for 10 years or more into your chosen scheme.
An SIP is especially useful for salaried individuals who can save and invest a certain amount each month however the benefits of SIPs apply to all investors.
