Safest way to still invest in stocks is SIP by SIP

"Why do you have the AC on at noon?" she asked, as soon as she entered the room with a view.

"Well, the October heat has hit the city early, this time," I replied.

"You know," she said, "I had just gone to the bank."

"And?"

"My friend who works as the wealth manager there asked me to get out of mutual funds and invest in fixed deposits."

"Oh."

"It seems the stock market is going to fall big time and it's best to be in fixed deposits."

"Ah. I didn't know that you had friend who could see the future."

"What do you mean?" she asked.

"Well. For one, how does she know the stock market is going to fall big time?"

"Hmmm. I guess its her job as a wealth manager."

"Well, her job as a wealth manager is to keep selling you different stuff at different points of time, as per her targets and the needs of the bank she works for."

"Now that you put it that way…"

"Basically, from what I know, you have a few systematic investment plans (SIP) going on in equity mutual funds."

"Yes, I do," she replied.

"Tell me something, do you know what is the exact idea behind an SIP?" I asked.

"Well, you tell me."

"The idea is to buy more when the stock market is falling. Stock prices have fallen over the last few weeks. This means the net asset values of mutual funds, which is basically their price, has fallen as well. Hence, for the same amount of money that you invest every month in a mutual fund, through an SIP, you can buy more mutual fund units."

"Yes."

"And that's how SIPs help in executing the old investment adage of buying low, to some extent."

"But why can't we just sell out right now and get into the mutual funds later, once the stock market has fallen sufficiently."

"Well, if you have so much expertise as to figure that out, why don't you just invest full time."

"Oh. Don't be sarcastic. I was just repeating what my friend told me."

"You are still stuck with her?" I asked. "It's not possible to know exactly when the stock market will go up or go down. Hence, the safest way to invest is to keep buying mutual fund units through SIPs."

"If you say so."

"You know mutual funds first started to advertise SIPs in a big way around 2004-2005. Back then fund managers used to suggest you should SIP for three years. Then they started to say five years."

"Hmmm."

"But in my experience, the real impact of an SIP comes after a decade, after the stock market has gone through different cycles of going up and falling down and the investor has ended up accumulating enough mutual fund units bought over a period of time."

"Acha."

"Let's say you had started an SIP of Rs 1,000 per month and invested in the growth option of the Aditya Birla SL Frontline Equity Fund, any guesses on how much your investment would be worth now?"

"No."

"As on September 26, 2018, it would be worth a little over Rs 6,25,000, with a rate of return of 15.65% per annum."

"Any other examples?"

"Oh yes. A similar investment in Franklin Bluechip Fund would be worth around Rs 5,34,000 at a return of 13.8% per year. In HDFC Equity Fund, it would be worth around Rs 6.38 lakh at 15.9% per year. An investment in the dividend option of SBI Magnum Taxgain would have given you close to Rs 5.78 lakh at the rate of 14.7% per year."

"Interesting."

"The trick is to keep investing slowly and regularly. It's not the best investment strategy, but given that there is a life to be lived and so many other things to do, it is the most optimal one."

"As you keep saying, drink stocks SIP by SIP," she replied.

I picked up the remote and reduced the temperate on the AC. The day had gotten hotter.

(The example is hypothetical)

Vivek Kaul is the author of the Easy Money trilogy.