Monthly automated investments in an ETF might be a little roundabout but helpful
By: Tavaga Research
Systematic investment plans (SIP) are a favored tool among retail investors in India. Yet, one of the retail investor-friendly products, ETFs, doesn’t have the traditional SIP route open.
An ETF is dealt with much the same way a share is – traded through a demat account, traded by units.
But a SIP mode in investing lets us invest regularly without having to bother with timing the market (which we need not). By taking away money at intervals, it ensures we don’t end up spending it all and contribute automatically to our wealth, like an automatic savings tool.
If we wish to, we can replicate a SIP’s crucial benefits – regular investments – with an ETF as well.
Some banks’ brokerage arms allow auto-investing in equities. Brokerages of banks such as SBI, Kotak, and ICICI let us choose either a fixed sum or a fixed number of units of a specific ETF (or share) at fixed intervals for a tenure we choose.
With other brokers, we can always arrange for a regular reminder, every month, to invest in an ETF, ie. place a trade.
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For the highly self-reliant, our trusty smartphones and digital calendars will come in handy with a monthly reminder to urge us to put away money in an ETF.
With ETFs, which give us the flexibility of choosing how many units we want to buy, it will still make more sense to fix the sum we want to invest monthly, rather than units. This allows for rupee cost averaging, bringing down our average cost for a unit over time. Rupee cost averaging buys us more units if the ETF’s unit price goes down and fewer units if it goes up because our investment sum is predetermined.
Whatever the method, a SIP-like arrangement for ETFs would still need us to choose which ETFs to invest in, the guiding principle should be to pick one which is liquid and has a large corpus or asset under management (AUM).