The systematic investment plan (SIP) has been a great mutual fund tool to create wealth over the long term. This has been consistently proved; both intuitively as well as statistically. However, one needs to keep in mind certain basic issues while designing the SIP. Some basic points will go a long way in ensuring that you get 100% value for your SIP.
An SIP is all about rupee cost averaging. Therefore to get the benefit of returns, you need to get the average cost in your favour. When markets are volatile, it often happens that in the short term your SIP may underperform the index. Remember, an SIP is not designed to give you bumper returns over the very short term. Ideally, the time frame for a SIP should be a minimum of 5 years. If you keep a 5 years perspective and stick to quality funds you will easily outperform the index over a period of 5 years. If you take a short term view and keep switching your SIP from one scheme to another, you will end up getting the worst average price in your funds.
The whole idea of an SIP is to help you meet your long term goals. The only difference is that in an SIP the market also plays along on your side so your contribution will be much lesser over a period of time. But there is still a risk that your SIP may be at cross purposes to your goals. How do you resolve that? The answer lies in pigeonholing your SIP to specific goals. Let us say that you require 3 lakhs after 3 years for a Swiss Holiday; Rs.4 lakhs after 4 years for your car’s margin money and Rs.10 lakh after 7 years to pay margin money on your apartment. You can dedicate specific SIPs for each of these needs. They may either be the same fund or different funds; that is entirely a decision you can take along with your financial advisor. The fact of the matter is that the more well defined your goals are, the easier it is to design an SIP to achieve these monetary targets.
This is a mistake that most investors in an MF SIP commit. They assume an Rs.10,000 investment per month and never bother to increase their SIP amount even when their incomes increase. This defeats the basic purpose of an SIP. The idea of an SIP is that you try to keep your savings ratio constant and in fact also increase it over a period of time. When you keep your SIP amount constant, then your savings ratio actually goes down when your income grows. Ensure that your SIP savings grow in tandem with your income. That will mean that some of your goals get front-ended and you will be able to accommodate more goals within your investment. This is a very important step as it makes the best contribution of your income towards your savings when your income level is growing. Ensure that your savings also grow proportionately with your income level.
You must ensure that your SIP does not get you into a liquidity crunch. If you are working and get your salary on the 1st of each month, then ensure that your SIP data is set at around the 5th. If you are in business and you have cash flows coming in spasmodically, then try to be conservative and design a weekly SIP. Also keep the SIP amount to match your assured income and not your variable income.
We have already discussed this point briefly when we spoke about long term investments. This point is a lot more specific. Many of us have the tendency to dip into our SIP savings as they are liquid and can be easily liquidated. However, this defeats the basic purpose of the SIP as wealth creation gets negatively impacted. Is there a way out? One way is to allocate 70% of your SIP to an ELSS. This will ensure that at least for 3 years this amount will be under lock-in and therefore you will be forced to resist the temptation of relying on the SIP for liquidity purposes. Whatever the emergency, always make it a point that your SIP is your last resort for financing the need.
A SIP is not just about rupee cost averaging. There are some basic pre-requisites that you need to understand to make a success of your SIP. Taking care of these basic points will go a long way in helping you genuinely create wealth through SIPs in the long run.
Online trading has redefined the contours of broking in more ways than one. It has brought about transparency in an otherwise opaque industry. It has made the entire order chain from order placement to confirmation to demat credit absolutely seamless. But above all it has empowered the retail investor like never before. With information and action at the tips of her fingers, online is a natural choice.
For those of us who have seen the pain of offline trading, the downsides were numerous. You placed an order and you could never be sure that you would get the best price for your order. More often than not, the dealer would prioritize your order based on your past relationship and brokerage revenue. A small investor was typically at a disadvantage in the broking game.
Online trading makes sense for a variety of reasons. Firstly, the investor is perfectly aware at what price the order can be placed and in what quantity. Secondly, online trading has created a democratic market place because what you see on the screen is largely what you get. The age-old risk of the dealer not operating in your interest is substantially, if not entirely, eliminated.
The biggest advantage of online trading is that it integrates 3 critical components of any trader’s interaction viz. banking funds, trading engine and demat holdings. The link between 3 components becomes virtually seamless in online trading. An investor is able to allocate funds of his choice, trade at the time and price of his choice and be rest assured that the demat credit comes on T+2 day.
No two opinions about that. Whether you run branches or franchises, the direct and indirect costs of establishing and maintaining the structure is huge. It also takes away your flexibility. Online trading saves the broker these blushes!
In online trading the discretion at a branch level or region level is largely absent. Since all the trades and orders are online, the broker has a measure of risk exposure at any point of time. Makes risk management a lot easier.
In online trading the discretion at a branch level or region level is largely absent. Since all the trades and orders are online, the broker has a measure of risk exposure at any point of time. Makes risk management a lot easier.
Unlike the offline model which is resource intensive, the online model is a one-time investment. Subsequently, the maintenance and support costs are substantially lower than the offline model. A sure kicker for ROI!
“Online Trading rewards scale by trading higher up-front costs with lower marginal costs” – John Katzman
An old broker friend once rightly said, “Online trading does not make you rich. But it surely saves you from becoming a sucker”. Back in the late 90s, the spread of online broking was helped by 2 major factors viz. dematerialized ownership and online banking. The spread of personal PCs and laptops only accentuated this trend towards online broking. That was the first phase of growth in online broking.
We are now at the beginning of the second phase of growth in online trading. The hardware has now shifted from being a PC / laptop to the more nimble Smartphone and notepads. Faster internet connections, broadband and Wi-Fi have ensured that it is almost possible to trade from anywhere without compromising security. Additionally, stiffer competition among brokers is forcing more retail investors to be migrated to the online platform. If anything, it will be for the benefit of retail investors.
The bottom-line is that online trading empowers retail investors like never before. As a customer you do not have to worry about being discriminated by the dealer for the size of your trading volumes. You can do the research, decide the price, decide the quantity and execute the entire transaction end-to-end from the comfort of your home or office. This empowerment is critical because it not only opens up a wide market for equities, but also ensures easy on-boarding of customers into equities.
Over the last many years, the broking industry in India has gone through a variety of crises. The biggest refrain has been the doubts in the minds of retail investors that they were not getting a fair deal in the equity markets. Not any longer. Online trading has ensured that the retail investor is empowered like never before. It is the future of equity market trading. It is also a golden opportunity for investors to take full control over their trading performance. The customer may finally be the king!