Recently i saw new ad of Max New York Life Insurance on Television, where in they are trying to convey message that they are the only one who are not Mis-Selling financial products & indirectly hinting that every one else is Mis-Selling Financial Products..My 1st impression was that they might have taken cue from my Article “Beware of Your Relationship Manager/Personal Banker” dated April 13, 2012 as i highlighted the same concern through my article..I am sharing the link of that article with the reader’s of my this post
Anyways Mis-Selling is rampant in BFSI (Banking Financial Services & Insurance) and No one can stop the same…Stopping the same means you are out of business. I can bet that today if u come to know all the terms and conditions of Insurance policy then even if Govt allow 200% exemption on Insurance premium under section 80(c), No one will buy Insurance..It is most Mis-Sold product in Financial Sector..Anyways i will through more light on this topic in my next blog…This blog is all about even more dangerous investment i.e. investment through SIP i.e. Systematic Investment Plan.
Hope u will agree that all financial investments by investors are based on his or her perception about that particular investment option…I would like to quote e.g. of my previous land lord who was senior citizen..His favourite investment tool or rather i say he was big fan of FD (Fixed Deposit) and Savings account..He had a full peace of mind that all his investments are safe…One day during informal chat i told him that Govt only secure investments upto 1 Lac in Savings account & FD’s…He was shocked to know this and then he diversified his investment in different branches of various banks to safeguard his investment…My objective was not to scare him but to alert him or inform him about the existing rule or u can say to create Financial awareness…Though this scenario is highly unlikely but when the question is of hard earned money then we should be aware of all the implications.
Similarly in case of SIP (Another Mis-Sold Concept), the Mutual Fund Industry is successful in creating 2 perceptions about SIP (a) Investments in SIP are safe becoz of Cost Averaging therefore you will get only positive returns in SIP (b) You should continue to invest even when Markets are falling to take advantage of Lower NAV’s. I have spoken to numerous people regarding SIP but i must say that these 2 perceptions are now permanently programmed in the minds of Investor.
To clarify, let me start with Statement that Investments in SIP are also equally unsafe as your Demat portfolio…SIP is not a Magical Stick that it will always give positive returns irrespective of Market Movement..Let me explain in layman language, Basically the returns on SIP investment depend on following factors
(a) Time of Start & End of SIP: The entry and exit timing is very crucial factor for SIP returns, If u have entered in Bear phase and exit in Bull phase then in all probability your returns will be good & vice versa.
(b) Investment Period: Suppose you opted for 12 SIP’s of 1000 Rs each..Every month you will purchase units at particular NAV (Net Asset Value)…To understand better lets assume Scenario A i.e. when u started SIP, NAV was 20 Rs and when u stopped SIP NAV was 23 Rs. During 12 months NAV reached at peak of 28 Rs..For 12 months your average NAV cost is 25 Rs…Which implies Market peaked during these 12 months and you purchased at high rate becoz of which your average is high at 25 Rs but at the end of SIP NAV is 23 Rs…Therefore you are at Loss…In simple terms you invested more during Bull Phase thus ur Average Cost is higher than today’s NAV.
Scenario B i.e. when u started NAV was 20 Rs and when u end NAV was 23 Rs. During 12 months NAV bottom out at 16 Rs & Your average cost is 21 Rs…Which implies Market was in bear phase most of the times during these 12 months and you purchased at low rate becoz of which your average is low at 21 Rs but at the end of SIP, NAV is 23 Rs…Therefore your investments are profitable …In simple terms you invested more during Bear Phase thus ur Average Cost is lower than today’s NAV.
In short cost averaging also cannot ensure positive returns, Timing is important.
To break 2nd myth that you continue to invest when markets are falling..I will take my example of Jan, 2008…I invested in some of the best performing MF’s at that time through SIP…I started investing in July, 2007 & then the markets peaked at around 20k in jan, 2008 and i was investing in these mutual funds through SIP…Since markets were in bull phase for quite sometime so my average NAV was on higher side..Now market started falling & i continued with my investment and Market bottom out at around 8k in few months so as NAV of my Mutual Funds..At that time my average purchase NAV was double then current NAV (At that time)…The lesson i learnt was that you can’t beat current market NAV by taking advantage of cost averaging. During bear phase in this scenario the Average Cost will always be much higher then Current Value if u started investing during Bull Phase…Lets take e.g. if u bought 2 units of MF at 200 Rs during bull phase therefore average is 100 Rs per unit now the NAV drop to 40 Rs and you buy another 3 at around this rate through SIP therefore now ur new average is 64 Rs against previous 100 Rs but current NAV is also 40 Rs therefore you are at loss of 24 Rs per unit for 5 units…When NAV will drop psychologically you are buying more and satisfied or rather happy that your average is dropping but u forgot that your current NAV is also dropping simultaneously…Most of the investors don’t understand this…When NAV will increase then your average is also increasing…In short if ur timing is not right then during bear phase current NAV will be lower then your average NAV with high standard deviation and during bull phase your average NAV will be lower than current NAV with low Standard Deviation therefore timing of entry & exit can make or break your whole game plan.
Now can someone tell me how your personal banker can make SIP investments profitable for u, we observed that it all depends on investment timings & No one in this world is master in timing the Market as Market is very unpredictable…
Based on my experience i can give u successful mantra for making money in equity market (including Equity/MF) i.e. Enter when market Bottom out and Exit when Market Peak but catch is no one can do that. If someone can master this art then he can play in millions else there is no way one can avert wealth depletion including Mutual Funds during blood bath…Lets accept and understand that Mutual Funds NAV will increase during Bull Phase & will definitely drop during Bear Phase..Only difference is Some Mutual Funds will grow faster then rest and some will fall faster then others..It all depend on Investment portfolio of Fund i.e. Shares it has in its portfolio…
If Mutual Fund investment through SIP has perfected in art to arrest downfall then all Mutual funds SIP should beat other indexes & always report profits irrespective of Market condition but unfortunately it’s not true , even top performing Mutual funds keep changing every 2 years…I remember in 2007, SBI Tax Gain ELSS was King of category but today it is placed among bottom heap…
Again i reiterate, SIP is not a magical stick so pls do thorough homework before investing in any Mutual Fund or for that matter in SIP. Timing of entry & exit is very important & only timing decides performance of your investment. Don’t fall into the trap of SIP. Invest wisely becoz its ur hard earned money.
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