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Saturday, August 9, 2008

If you must SIP, sip good Darjeeling tea

Edward Luce, the Financial Times correspondent who was stationed in Delhi and is now at Washington DC, has written an eminently readable book on the challenges faced by the growth story of modern India. Called "In Spite of the Gods", the book postulates that the reason for the success of a vibrant democracy is India's diversity.

This diversity can be exemplified by how tea is prepared in different parts of India. In the west, tea leaves, water, sugar and milk are brought to a boil in a pan. In the north, spices like cardamom or ginger or both are mixed with the tea to make 'masala chai'. In the south, coffee is the preferred drink, though a large quantity of tea is grown in the Nilgiris.

In the east, there is Assam tea - a strong rich brew prepared with milk and sugar. And then there is the queen of teas - Darjeeling - whose beautiful bouquet and light taste emerges only if it is brewed in a pre-warmed porcelain tea pot and sipped without adding milk.

That brings us to another SIP, or a Systematic Investment Plan (another of those investment myths!). A disciplined and conscientious investor should have no problems with saving a fixed amount of money every month or every quarter. But is it necessary to invest that sum every month or every quarter on a particular date?

The fund managers of most Mutual Funds will say a resounding "Yes".  They even provide examples on offer documents or on business channels to prove their point that investing a fixed amount on a particular day every month or every quarter is the way to untold riches.

Like a dummy, I listened to their collective advice and started a 12 months SIP in a well known diversified equity fund in the middle of 2004. By the time my 12 monthly installments were complete, I found to my horror that my average price per unit had continuously climbed up - along with the stock market. For my last monthly installment, units cost as much as 40% more than the units bought with the first monthly installment!

One lives and learns. The only people who get rich from your SIP is the fund manager. SIPs provide a steady monthly (or quarterly) revenue to the fund without the fund manager spending any time or effort in selling the fund.

In a trending market - whether it is moving up or down - a SIP will always make your average cost per unit much higher than the cost you will incur at the beginning of an up trend or the end of a down trend.

Is a SIP completely worthless? No, it works if a market is moving sideways - some times up and some times down within a range - without a clearly discernible up trend or down trend. How often do such sideways movements happen?

Not very often, and even when they do, they last for a short period of 3 weeks to 3 months - not long enough to benefit from the price averaging that a SIP will provide.

So heed a word of advice. Buy some good Darjeeling tea and learn how to prepare a proper brew. Savour the taste and flavour by taking small sips. And avoid SIPs.

(Note: No, I haven't joined a tea company. But I have alluded to another investment myth: Timing the market vs. Time in the market. That myth will get debunked in a future post.)


Eswar Santhosh said...

SIP is not a bad idea. Only for whom is the question. Why do you want to spoil other investors and curtail the "regular inflows" the MF industry seems to be betting on? :)

Actually your "timing" of stopping the SIP is wrong. You should have continued it till May 2006 or Jan 2008 and should have witnessed the "averaging" part of SIP in action :)

Subhankar said...

It seemed like a bad idea to me, Eswar. Just got tired of averaging up for 12 months, I guess.

It was my first try at investing in MFs, and I realised that I had developed enough discipline to work and pick my own stocks as I had always done earlier.

I'll try to write a post on 'timing' one of these days.

Eswar Santhosh said...

I agree with you that SIP is a bad idea in bull markets. I too had SIP-ped and Stopped. I am no longer interested in Mutual funds mostly because I there is no way to "evaluate" mutual funds. I do invest funds in Debt Oriented Mutual funds from time to time, but not equity MFs.

SIP is heavily advertised by the MF industry and like all things seems like a very good idea. But, I think it serves the interest of the AMCs better - means of a regular cash flow through the highs and the lows.

Let us check their SIP records if this bear market lasts about another year :)

I was just kidding about the "timing" : If you had averaged up from 2004 to 2008 with a brief 4-5 months of down-time during 2006, I bet your average cost would not have come down in spite of the current bear market.

Subhankar said...

Have you tried Balanced Funds, Eswar?

For the past few years, I have stayed invested in HDFC's Prudence fund (Dividend payout option). Every year it has given a 'dividend' which works out to 17.5% of my original capital and higher when I have bought additional units at lower prices. I treat it like a Fixed deposit with zero tax liability, and keep topping up during down trends.

Mutual Fund India said...


Your post is very good. i have copied the same on my blog. I hope you do not mind for that.

You can visit my blog on

Subhankar said...

I'm glad that you liked my post. But it would have been nice if you had sought my permission before copying my article on your blog.

Since you have done it already, please provide a link to my blog at the bottom of the article (where you have mentioned the source). Thanks.

Eswar Santhosh said...

My Strategy is described in my blog post here :

If you have time, I'd very much appreciate your frank opinion on my strategy.

Subhankar said...

Hi Eswar

Inadvertently your comment got overlooked and wasn't published earlier. Sorry about that.

Your MF strategy appears quite practical. At one point of time I had looked at all the different types of funds to see if I can squeeze out an extra couple of percentage points of return. But felt that the tax implications were too complicated and time consuming.

vachas said...

in all simple words i state "so well in simple but beautiful language subhanker sir present the case like a vertern H professor.

i love reading his write up.
a class par excellent.

all his write ups are a treaure of informations and in brief

jacob mathew

Subhankar said...

Appreciate your comments, Jacob.