The Hindu Business Line : Fund Talk

I regularly follow your column and have often found you recommending the Systematic Investment Plan route while investing in mutual funds. When I invest in ELSS funds through the SIP route, I find that redemptions become very difficult, as they need to be staggered over a long period. Since I have to wait for 36 months to redeem every instalment, I have to wait for six years to get back the entire amount. What is the ideal solution for this?

Y. Rajesh

Investments in an equity fund deliver the best results over a long holding period (of, say, 10-15 years) with continued SIP investments over a 3-5 year time-frame. However, if you are investing in ELSS funds with a three-year investment horizon in mind, you could circumvent the problems associated with the lock-in period, by opting for fewer instalments that are larger in size.

For instance, if you intend to invest Rs 45,000 in a year, you could spread this out through six instalments of Rs 7,500 each. This would enable you to redeem your entire investment in three years and six months. Starting your ELSS investments in April of each year, instead of waiting for the latter part of the year, may also help you seek earlier redemption.

However, you should note that doing this may expose your investment to a higher downside risk than would a SIP spread out over a three-year period. The SIP route is usually recommended because it helps you phase out your entry into the equity markets over an extended period of time, helping you benefit from market cycles. If there is a significant correction in stock prices even as you invest, you reap the benefit of that by acquiring some units at relatively low prices.

When you compress your SIP into just a six-month or one-year window, there is the risk that your entire investment will be made over just one market phase. If the stock market was range-bound or on a steady uptick over that particular six-month period, the average cost of your investments could remain quite high. For instance, investors who made SIP investments in the six months from November 2005 to April 2006 would have invested the entire corpus in a relatively buoyant stock market.

Though it may not deliver the complete benefits of SIP investing, going in for a six-month or one-year SIP could still deliver limited benefits, when compared to investing a lump-sum into equities at one go. We believe that stock market valuations are at relatively stiff levels after the sustained appreciation of the past five years. Investors who plan to enter equity funds at this point in time therefore, have reason to be wary of a correction or decline in stock prices.

Investing a lumpsum into an equity fund at this juncture could expose investors to the pitfalls of bad timing, and destroy value, if there is a corrective phase. Therefore, even a six month or one-year SIP appears a better alternative to lumpsum investments in the case of ELSS funds.

Aarati Krishnan

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