Making judicious use of SIP/STP

SIP (Systematic investment plan) & STP (systematic transfer plan) have been popular amongst investors as efficient modes of investment. When an investor chooses to invest via an SIP, he makes investments in smaller denominations at regular time intervals as opposed to making a single lump sum investment. The underlying intention is to benefit from the volatility in equity markets by lowering the average purchase cost. This method is popularly known as 'Rupee cost averaging'. While in SIP money is transferred from your bank account, in STP it is transferred from another short term liquid Mutual Fund scheme such as 'Money Market Mutual Fund'.

An SIP ensures that the investor stays on course for achieving his long term financial goals by investing in a disciplined manner. SIP makes irrelevant the concept of 'timing the market'.
However, an SIP may not be able to lower the average purchase cost if equity markets rise/fall in a secular manner. In such a scenario, the average purchase cost could actually rise. A report published in 'The Hindu Business Line' on 29th March 2009 says "SIP investors in MFs hit the most by equities drop". The data for the period February 2007 to February 2009 for tax saving MF schemes reveals that investors through SIP have suffered a negative return of between 34-40% over the period as compared to a negative return of 20-23% on an investment through a non SIP mode over the same period. Hit by the poor returns many investors are discontinuing their SIP mode at this juncture, which is a costly mistake.

How can an investor benefit through SIP/STP? Although most Financial advisers advocate the SIP/STP method to their clients for long term investment, they fail to educate the investor of the short term pitfalls of this mode of investment. However, even for SIP/STP investors unprecedented/secular rise or fall in the markets could be used for transferring funds from long term equity schemes to short term debt MF schemes and vice versa. Effective cash management is a skill that each investor must learn, without forgetting the judicious use of SIP/STP for wealth creation in the long run.