Have SIPs failed?

The word on the street is that SIPs have failed. Investors who have been investing steadily through Systematic Investing Plans find that their investors too are deep under water. Even SIPs that have been running for long periods are in losses or barely breaking even. There's no denying this. If you started an SIP about five years ago when the Sensex (^BSESN : 10348.83 +446.84) was at 5,000 and invested Rs 10,000 a month in a fund that about kept pace with the Sensex, you would be just about even today. You would have invested Rs 6 lakh but the current value of investment would be about Rs 5.9 lakh. The losses are far worse for SIPs that were started later. Investors who started SIPs say, three years ago, are down by a total of 24% over a period when the Sensex has lost 14%.

Naturally, investors are seriously put off by this. After all, SIPs were supposed to be the panacea of fund investment. They epitomise the slow and steady method of investment that people like me advise, don't they? Then how can SIP apparently do so much worse than lump-sum investments? There are even articles in the press saying that fund investors are cancelling their SIP plans in some numbers. Why has this happened? And are investors right in stopping their investments now?

The first thing that is obvious here is that SIPs do not guarantee profits under all circumstances. The point of SIPs is that you keep buying at all levels-high and low-regardless of what your instincts urge you to do. You automatically buy more when the market is low and less when the market is high. Without an SIP, investors invariably tend to do the opposite. In the long-term, given the general upward trend of stock prices, this strategy leads to much better profits than picking and choosing and trying to time the markets themselves.

But that does not amount to magic. In the face of the kind of collapse that the stock markets have seen over the last year, no investing strategy is immune. If you have been doing an SIP over the last five years, then most of that period, you have been investing at very high levels of the markets. You have been investing when the market was at 10,000 and 15,000 and 20,000 and even 22,000. It's no surprise that now when it's down to 9,000 or 10,000 you are in losses.

And as for comparing this to a lump sum investment made five years ago, obviously anyone making a single investment at 5,000 and comparing it to 10,000 has doubled his money. But such people do not exist. I can't imagine any human being who could have invested five years ago and then stopped investing more. To actually have followed such a strategy you would have to able to foresee the future or be a genius. To compare this to a real world investors' SIP is a useless exercise of 20/20 hindsight.

The more important issue is whether investors should be stopping their SIPs under current circumstances. In my opinion, that would be disastrous. The whole point of SIP investment is to keep investing when the market is down. If you are going to run an SIP when the markets are up and abandon it when they are down then what's the point? It's just market timing under the guise of SIPs. When the markets recover again, it's only then that you will reap the benefits of investing when they were down.

The author is CEO, Value Research

IMF sees world economy shrinking up to 1 pct in 2009

MADRID (Reuters) - The International Monetary Fund sees the world economy contracting by between 0.5 and 1 percent in 2009, Managing Director Dominique Strauss-Kahn said in an interview published on Wednesday.

He said a recovery could come in the first two quarters of 2010.

"If ... economic policies are appropriate, the recovery should come in the first two quarters of 2010," he told Spanish newspaper El Pais.

The IMF said last month in two reports prepared for a meeting of Group of 20 nations this week that the global economy will shrink as much as 1 percent this year -- its first contraction since World War Two.

It forecast a gradual recovery in 2010.

Separately, Strauss-Kahn said it was possible the European Central Bank could resort to purchasing assets with newly created money to boost the money supply.

"I'm sure that, if necessary, it will not hold back, but be active against a fall in prices," he said.

With regards to Spain, Strauss-Kahn said although Spanish banks were not directly exposed to U.S toxic assets they had created their own.

"I'm more worried about the consequences of the real estate boom on the Spanish banking system than the direct impact of U.S toxic assets," he said.

He said there could be problems with some Spanish banks needing government help although the system overall was healthy.

Spain on Sunday launched its first bank rescue of the global financial crisis to prevent solvency problems at unlisted savings bank Caja Castilla la Mancha (CCM).

Spanish banks' capital and liquidity levels are being worn down by limited access to money markets and soaring debt defaults during Spain's recession.