You will find a big gang of supporters for SIP (systematic investment plan). For those who do not know what exactly this is, allow me to explain.
SIP is nothing but the process of investing your money bit by bit every month or so in equal proportions. This is in total contrast to investing huge sum of money at once. Historically, this has been said to be the preferred way of investing in the stock market and surviving its highs and lows. The question that arises now is, does it really work? Yes, to a great extent, it does. The second question, is it always the best option? No. It is not.
First, let us see why it works. The market goes up and so does the NAV or purchase price of each unit share. Suppose you purchase 10 units in 1st month. The market crashes after that by 50 percent. You still buy more and at the same price as before, get 20 units. When market comes back to initial level, your $200 investment has become $300. Compare this with one time investment of $200 at start of 1st month which would have remained the same.
Second, why you should not blindly follow SIP every time. If you are very sure of the market movement in the long run, always go for one time lump-sum investment. A stock going up by 10% in 1st month & 10% in 2nd will grow your one time investment by 21% but your SIP by only 16 percent!
In times of recession like this, when any seasoned investor will tell you that in the time frame of 2-3 years, the market will see a great upsurge, I believe lump sum investment to be the best strategy.
Author: Himanshu Chandra
Article Source: EzineArticles.com
Provided by: Pressure cooker
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