Annual SIP helps only in a sustained bull run

In a volatile market, it cannot give the benefit of rupee cost averaging

You invest Rs 10,000 every month in mutual funds through a systematic investment plan (SIP). If you had the funds would you like the option of investing Rs 1 lakh once a year? After all, it is more convenient than investing every month, isn’t it? But will it offer the same benefits as investing regularly?

Reliance Mutual Fund recently launched an annual SIP option for all its mutual fund schemes. This is an additional option for those who want to invest a larger amount at one go, instead of smaller amounts. It is more a matter of convenience, says Himanshu Vyapak, Deputy CEO, Reliance MF.

“For the industry, the average amount through monthly SIPs is Rs 2,500. But someone who wants to invest Rs 1 lakh in a year may choose to do it through an annual SIP,” he says.

The annual SIP also allows for top-up, that is, the option to increase the amount, just like other SIPs. Most fund houses allow monthly or quarterly SIPs. Investors can choose the date of investment and the amount to be invested. A SIP helps instil discipline, by setting aside a fixed amount of money regularly. Most investors prefer the monthly SIP, since it can be timed to coincide with their salary, similar to a loan installment.  By investing through SIP, investors do away with the risk of timing the market, that is, buying more when the market is down and less when the market is up. Since the investment is done at regular intervals, the price of the stock or unit will average out over the entire investment period. This is called rupee-cost averaging. When the market is down the fund purchases more number of units and when the market is up, it purchases fewer units.

In a monthly SIP, the investor will invest on a regular basis, allowing him to capture both the upside and downside in markets, says Renu Pothen, research head, iFAST Financial India. So, investors should opt for a monthly option rather than an annual payment option under the SIP facility, since the latter is more like a lumpsum investment.

This benefit is lost when you make a lumpsum investment. In order to make good returns in a lumpsum investment you should ideally do it when the market is down. This is something that retail investors find difficult to do.

Certified Financial Planner, Arnav Pandya, also agrees that an annual SIP is similar to lumpsum investment. “It can work in a rising market when you know that the bull rally will last for, maybe, five years or so. In such a case a lumpsum investment will give better returns than a SIP. But lumpsum investment or an annual SIP will not work in an uncertain market. In that case a monthly SIP will help by buying at various price levels,” he explains. According to Niranjan Risbood, director, fund research, Morningstar India, for an annual SIP to get the benefit of averaging, the investment horizon should be 10-15 years or more. “There should be at least 10-11 installments through SIP to get the benefit of averaging. Hence, in annual SIP the investment horizon should be much longer than a monthly or quarterly SIP,'' Risbood says.

This mode is unlikely to attract too many investors and may appeal only to high networth investors. “For instance, employees of top companies who get a huge annual bonus every year, may want to invest through an annual SIP,'' Risbood adds.

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