• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

For the systematic investing strategy to succeed, you need to stay invested through a complete boom-bust phase in the market.

I am investing Rs.2000 per month through systematic Investment plans in four equity funds- Franklin Prima, Franklin Bluechip, HSBC Equity and HDFC Prudence. The investment is for 6 months. The SIP comes to a close in March this year. Should I continue to invest in these? Should I switch to some other funds?

Dr S. Preeti

Mumbai

You should continue your investments in these funds. Systematic investing (SIPs), as investment strategy, works best if you continue to invest regularly through the ups and downs of the stock market.

SIPs are appropriate for retail investors as they help you use a concept called "rupee-cost averaging" to your advantage.

This concept helps you buy more equity fund units when the markets are at low levels and fewer units when they are buoyant.

Therefore, for a SIP strategy to succeed, you need to continue investing through a complete boom-bust phase in the market, over several years, if possible.

When you use a SIP to invest for as short a period as six months, it suffers from much the same disadvantages as a lump-sum investment.

If the markets were in a buoyant phase during your investment, but declined later, you would suffer from the disadvantage of bad timing.

As you began investing in October 2004, much of your investments would have been made at Sensex levels of between 5600 and 6600.

Should the stock market fall below this level, your investment could take a knock in value.

If you continued to invest after March and the market trends lower, you will be in a position to lower the average cost at which you have bought units.

However, equity investments are quite risky. As they carry the possibility of an erosion in the value of your investment, you should have some mechanism in place to make sure that you do not expose too much of your savings to equity risks. One way to cash in on periods of good performance from your equity funds, would be to subscribe to their dividend options.

This way, you automatically receive dividends during periods of good stock market performance. Dividends are also exempt from tax.

Another method of doing this would be to keep a close watch on the value of your investment to see if you are comfortable with the total amount you have at stake in equity funds.

The value of the investment would be much higher than your cost as each of these funds have delivered double digit returns over the past year.

Check on the present value of your investments in equity funds and see if they make up a very large portion of your savings.

If they account for over say 30 per cent of your savings, you should consider rebalancing your portfolio and switching some money into debt investments.

Your choice of funds is fine, as each of them have a good five-year record. Continue with the same funds as switching frequently from one fund to another may be counter-productive over the long term.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859/860 Anna Salai, Chennai 600002.

Aarati Krishnan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Open offer for ACC: Accept; Buy at lower levels

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line