Seamless Investment Plan: SIPs

Timing your SIPs is a bad idea. Just be disciplined about them and you will do well

A popular stock-market adage is 'Time in the market is more important than timing the market'. It may be a popular principle but, unfortunately, it is not highly observed. Due to some quirk in human nature, we tend to be overconfident of our abilities to predict the future. So, we end up timing the market. The curious thing about market timing is that the market, almost unfailingly, moves in the opposite direction. If you buy shares in a company, thinking that 'this' is the right time, you are appalled by the fact that the stock starts to fall just after you buy it. Similarly, if you sell out your shares in a company because you have a strong gut feeling that it's going to collapse, you find it racing ahead of just everything.

If you giggle at the above stock-investor behavior because you invest in mutual funds, even you may not be immune to it. Mutual funds investors frequently try to time their systematic investments as per the market's ups and downs. When the market is falling, they stop their SIPs. When it's rising, they increase their SIP amounts. Doing so, unwittingly, they try to time the market and this market timing also backfires.

SIPs work best when the markets are volatile. When the markets are high, you buy fewer units of your mutual funds through SIPs. When the markets are down, you buy more units for the same amount. This enables you to average your investment cost over time. But if you stop SIPs when the markets are down, you miss out on lowering your total investment cost. And if you increase your SIP amounts when the markets are on the rise, you keep averaging your overall cost upwards.

Now you may say that the solution for this problem is that one does just the opposite: stop doing SIPs when the markets are rising and increase the SIP amounts when they are falling. Unfortunately, that's also market timing and is unfruitful. First, it's counter-intuitive. Many investors will have difficulty in doing so. Second, you never know how long the market may keep going up or falling.

All in all, it's quite unproductive to time the market. The beauty of SIPs is that, by definition, they prevent you from timing the market. SIPs are about discipline. You decide an amount and a frequency, which in most cases is monthly. Then you keep investing in the mutual fund of your choice, irrespective of where the market is. Of course, you can increase your SIP amount yearly as your pay increases but then invest it evenly till the next revision. Since the markets are volatile, you will naturally benefit from the power of rupee cost averaging, which will bolster your returns.