SIPs for all reasons

With Systematic Investment Plans, you can achieve life goals while making profit

The importance of systematic investment plans (SIPs) is widely discussed when stock markets plumb lows as in recent times. In this article, we discuss two related concepts — SIPs and rupee-cost averaging (RCA).

There is a subtle difference between SIP and RCA. SIP is set up as an automatic debit from your monthly income. The objective of an SIP is to have a disciplined approach to saving. In contrast, RCA is a SIP set up for a short period. The key difference is that in RCA you have a choice between making lump-sum investment and spreading the investment over a pre-defined period.

For instance, you can set up a SIP for eight years on an index fund or an exchange-traded fund (ETF) if you are pursuing an eight-year goal.

In contrast, if you have ₹2 lakh in surplus cash, you may choose to invest the entire money now (lump-sum investing) or spread the investment over four months of ₹50,000 each (RCA).

There are certain factors that you must consider when setting up an SIP — a date for the SIP, the frequency and the length of the investment. A SIP is best set up on the day when your income is credited to your bank account. That way, you save first and spend the rest. Also, there is enough money in the bank account to process the SIP. You should typically have one SIP every month for each goal. Setting up more than one SIP every month is unlikely to complicate your investment process, but there may not be great benefits in doing so.

Even as you invest to achieve life goals, you should aim to capture short-term movements in the market. The most optimal way is to trade based on technical analysis. But not everyone is comfortable doing so. Setting up short-term SIPs with pre-determined rules can be an alternative to trading using technical analysis.

For instance, you may set up SIPs on Nifty ETF and Gold ETF for 12 months and take profits if the investment carries pre-defined, unrealised gains. It is best to define these gains in absolute terms than as percentages.