Keep sipping for healthy returns

The esteemed readers of this column are well aware of the benefits of a Systematic Investing Plan (SIP) and the discipline required to go with it. I just have to add that you can consider investing in any Exchange Traded Fund (ETF) that tracks either the Nifty or the Sensex. The most liquid equity ETF is GS Nifty BEES. GS stands for Goldman Sachs. You may choose any ETF that tracks the Nifty or the Sensex. I have used this only as an example.

The biggest advantage of Index investing, from a layman’s viewpoint, is that you can confidently keep on averaging the Index. The same can’t be said about any individual stock, even if it happens to be an Index constituent.

While you can buy and forget an Index for the long term, you can’t afford to do that for a stock. When you buy an individual stock, you will have to keep an eye on the performance and decide when to sell that stock. Whereas in the case of Nifty Bees, you are buying an ETF that tracks the Nifty. The Index Policy Committee of the exchange would decide what stocks to add or retire from the index.

The Nifty has undergone as many as 23 changes in the past five years. Remember that in the Sensex, which has 30 stock constituents, there have been 51 changes since inception ( 1986). In the 50-share Nifty, there have been 66 changes since inception (1995). The Nifty periodically throws out bad stocks and takes in relevant to the times.

The fund manager for the ETF is like a blinkered tonga horse with no room to take his own decision. He just has to run straight ahead. He has to buy the Index constituents in the same proportion, in the Nifty. Nothing more, nothing less.

The question uppermost in the minds of investors these days would be, “Is this the right time to start a SIP in Nifty Bees?”

The answer is a simple yes! Any time is a good time to start. What if you had started investing on January 8, 2008, when the Nifty had peaked at 6,357, the highest point ever seen in its history? Scared? Let’s see.

From those levels, the Nifty is down 23 per cent today after 47 months. But your portfolio, made by investing in Nifty Bees every month, is up by 6.24 per cent. This is no miracle. The trick lies in buying confidently every month irrespective of what the markets or the newspaper headlines are.

Index buying makes sense even if you are not a systematic but a one-time investor. If you had bought Infosys and Wipro at the peak of the IT boom in the year 2000, Infosys has given you just 57 per cent capital appreciation (CAGR of 3.9 per cent) while Wipro is down 57 per cent.

The point I am making is that even if you buy a blue chip at the wrong time, you can’t be sure whether it will give returns. But had you bought the Nifty at its peak in the Year 2000 at 1,818, the return today would still be 167 per cent or a tax-free CAGR of 8.7 per cent.

Don’t worry. Start Sipping.

The author is the Head of Private Broking & Wealth Management at HDFC Securities.