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Getting the timing right

August 18, 2014

Yearly SIPs make sense only if you plan to keep investing for the long term

MOST MUTUAL fund investors are aware of systematic investment plans or SIPs. These help people save a fixed sum at regular intervals and inculcate financial discipline without getting into the business of timing the market. And most important, it gives the benefit of cost averaging due to staggered purchase of units. This means you get more units when markets are down and less when they are up, averaging out the cost over the long term.

However, how staggered should the investments be? Most funds give weekly, monthly and quarterly SIP options. Some also offer daily SIPs.

Now, we also have the option of a yearly SIP. In this option, launched by Reliance mutual fund, a person will be able to invest once a year on a given date.

Does it make sense go for such a product? And, can an investment done just once a year can be called a systematic investment? Sandeep Sikka, CEO, Reliance Capital Asset Management, says the product has been launched for people who want to invest for the long term but cannot invest as frequently as a week or a month.

" We have provided investors an additional option and not withdrawn any option. Investors can choose as per their cash flow requirement," he says.

He says a yearly SIP over 10- 12 years will also provide the benefit of cost averaging.

What the investor chooses will depend upon his risk appetite and cash flow.

" We expect big investments under this option. It will cater to the needs of people who get lump sums such as annual bonuses and want to put the money into equities for the long term but generally forget to do it," he adds. The minimum investment under the option is just ` 500.

But certified financial planners have a different view. " One objective of SIP is accumulating wealth and earning returns. Investing once a year may require a person to invest a lot of money at one go, which means he may miss the benefit of cost averaging.

This can have a negative impact on the portfolio if the market falls. If an investor is willing to invest a lump sum once a year, he must do it via systematic transfer plans or STPs," says Anil Rego, CEO, Right Horizons.

STPs usually involve By Renu Yadav transferring investment from one asset into another over a period.

Vivek Karwa, a certified financial planner, says yearly SIP does not make sense. " In monthly SIP, the person is aware that a certain sum is going to be deducted from his bank account on a particular day and so he ensures that there is money in the account. In yearly SIP, there is a high chance of missing the payment date," he says.

However, Manoj Nagpal, an independent financial adviser, has a different opinion altogether.

He says mutual funds are taking a cue from the insurance industry where yearly premium payments are the most popular, besides having the lowest lapse rate.

" Monthly SIP makes more sense than yearly SIP. But the industry feels that monthly SIPs do not continue for long periods. Even when people enrol for a long tenure of, say, five years, they generally stop after two- three years. The same lesson has been learnt by the insurance industry, which also provides monthly, quarterly and yearly payment options. Here too most policies that lapse are monthly payment ones. The number of policies that lapse is the minimum in case of the yearly option.

We have provided investors an additional option and not withdrawn any option.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Mail Today (India)

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