Sip into the Systematic Investment Plan (SIP)

Invest small, Earn LARGE

Not many of us would have ever missed the story of the rabbit and the tortoise. We all know how the tortoise, despite its slow pace, managed to outpace the rabbit in the race by its sheer consistency and patience. Why did the rabbit lose? There could be numerous reasons to it. One, definitely, is inconsistency but what is more important is that the time when it decided to put in a large effort might not have been right, given the environmental factors. The tortoise, on the other hand, kept continuously going at its sedate pace and the environmental factors were small and widely dispersed in the long time duration that the tortoise spent on the race track.

This timeless story definitely has a moral and an impact on our lives today. The stock markets have shown tendency to be volatile. Such has been the inconsistency, displayed by the equity markets, that novices have sometimes managed to earn big while the grandfathers of the market, who have spent years, eating, drinking and sleeping the stock markets, have had their stocks testing their depths and losses counting their glory at their peaks. The need of the hour, with the volatility in the markets showing no respite in the near future, is to be the tortoise and not have intermittent investments of large amounts. It would instead be suggested to invest smaller amounts at frequent intervals.

Let us take an example. Hypothetically assuming that a stock was at a level of 5500 points in January, 2010. It then went to 5750 in February 2010 and took a deep plunge to 5000 in March 2010. April and May of the same year were stable with the stock being at 4950 and 5100 levels respectively. June saw a further dip to 4750 levels while July saw a revival taking the stock to 4900 points. The stock sky rocketed to 5500 points in September, with August seeing levels of 5250.

January, 2010	5500
February, 2010	5750
March, 2010	5000
April, 2010	4950
May, 2010	5100
June, 2010	4750
July, 2010	4900
August, 2010	5250
September, 2010	5500

If we look at this hypothetical situation, we would realize that if we were intermittent investors and we would have invested in the stock in February then we would have been at a loss of Rs. 250 on each share. Assuming that there were 120 shares, the total loss counts to Rs. 30,000.

On the other hand, if we were a regular investor and had been purchasing 10 shares of the stock every month, notwithstanding its levels, then we would have been in a different situation. Following, would have been our portfolio’s value in case we purchased shares of the stock every month.

Month	Stock Rates	Investment	Current Profit/Loss
January, 2010	5500	55000	0
February, 2010	5750	57500	-2500
March, 2010	5000	50000	+5000
April, 2010	4950	49500	+5500
May, 2010	5100	51000	+4000
June, 2010	4750	47500	+7500
July, 2010	4900	49000	+6000
August, 2010	5250	52500	+2500
September, 2010	5500	55000	0
Total			+28,000

Hence, with the same number of shares and the same time duration; a sedate investor is able to earn Rs. 28,000 while many other investors might be incurring losses because of their approach of betting big during selected periods.

Such continuous periodical investment is called the Systematic Investment Plan (SIP). Under this scheme, the investor is required to put in a fixed amount of money at fixed time intervals into the stock markets. This is done through the medium of Mutual Funds, who receive the regular investments from the investors and invest the amount into the stock markets. Such systematic investment plan could start from an amount as low as 500 and could then notch up to higher amount levels. Since their inception, such plans have been able to deliver results and the returns are such that the investors have been spell bound by its effectiveness. All in all, it seems like a prudent option to be going slow to be getting big.