The systematic investment plan (SIP) is perhaps the best way to invest in Mutual Funds. It enables an investor invest in a disciplined manner every month, while also reducing average costs on a continuous basis.
When stock markets correct, securities trade at lowered prices. Buying equity securities during these dips allow you to reduce the purchase price of your investment. In theory, the lower your purchase price, the larger could be your profits in the long term.
Most open-ended Mutual Fund schemes allow investors to buy additional fund units through lump-sum investments. Even if you are running an SIP account, nothing stops you from making an additional, one-time purchase in the same fund. When you do this during a market correction, it helps lower your purchase price.
Understanding Additional Purchase
Let’s say you have an SIP account with Rs. 2,000 as your monthly contribution with the deduction date as 10th of every month. At the same time, suppose you have a surplus amount of Rs. 5,000 on a day when the markets have corrected. You can use this opportunity to make an additional investment in your fund. It will not affect your running SIP. Several investors opt for such purchases especially on days when the value of the underlying securities – like stocks or bonds – go down significantly.
How Does Additional Purchase Help Investors?
Let’s assume you have a goal-oriented SIP in an equity mutual fund scheme with a monthly instalment of Rs. 2,000 for 20 years or 240 months. Assume you have plans to use it for your children for their higher education needs.
This means you will end up investing a sum of Rs. 4.8 lakh during this tenure. The historical track records of equity funds suggest that cumulative value of the invested sum will be several times more than the principal.
Since an investment tenure of twenty years is a fairly long period and India being an emerging economy, our stock market would see several cycles of growth and recession. Common sense says that one must attempt to buy assets when they are relatively cheaper. And it is applicable on all asset classes including equity.
In short, it is wise for investors to keep purchasing additional mutual fund units when opportunities such as a cash surplus or a lowering market present themselves. Investors who look to purchase units during market corrections or crashes can make greater profits than those investing only through SIPs.
Observing the markets for periodic dips may not be easy due to your work schedule. Here, your investment advisor can be a big helping hand. You need to be in regular touch with your advisor to be alert about investment opportunities so that your surplus liquidity in the bank account can be used to make serious gains and to grow your money at a faster rate.
If you as an investor are serious about wealth creation, the strategy of buying on dips will not only reduce your cost of investments but will reward you handsomely as the compounded nature of returns do wonders in the long term.
Furthermore, the habit of making additional purchases will make you allocate more of your money towards appreciating assets. A mix of SIP and additional purchases makes you a smart investor who will hit his money goals on time.
The writer is CEO, BankBazaar.com.