The benefits of spreading one’s exposure (diversification across asset classes, sectors, countries etc) in any investment activity are well chronicled. What is less highlighted is the benefit arising out of spreading the timing of one’s actions.
Rather than investing, disinvesting or switching entire portfolio at a single point of time, it is prudent to spread these actions systematically over a period of time. This also curbs the tendency of an investor to time the market, an investment style that several researchers have statistically proved as having a poor probability of success.
This principle has given rise to the concepts of:
- Systematic Investment Plan(SIP)
- Systematic Withdrawal Plan(SWP)
- Systematic Transfer Plan(STP)
A “systematic investment plan” is an investment strategy used in mutual fund investing that allows investments of
Fixed amount + at regular intervals + at the prevailing NAV of that day.
Advantages of SIP
- It helps avoid investing large sums in volatile and overheated markets
- It forces the investor to commit investments in any market scenario
- It instills discipline forced saving
- It allows investments of small amounts as low as Rs.1000
- It is easy to understand and operate