Small investments, big payoff: SIPs and their benefits

Events of the past year have underscored the need for UAE residents to have emergency funds and personal savings accounts. When times get tough, the tough have money saved away.

The easiest way to build up those savings is by putting small amounts of money away on a regular basis. If you ever had a little money box as a child, you’ll know how quickly money adds up. An amount that seems insignificant in isolation can grow into a significant sum over time with regular deposits.

The grown-up equivalent of that money box is a Systematic Investment Plan (SIP), where you make recurring payments at regular intervals to purchase shares in a mutual fund or other fractional asset classes. Such payments are made on a weekly, monthly, or quarterly basis and can be small amounts that are easier to set aside than the large lump sums that would otherwise be required.

To understand how SIPs can benefit investors in the UAE, we need to look at a strategy called dollar-cost averaging (DCA). When you make recurring SIP investments, they average out the cost of the investment over the course of its tenure.

By putting the same dollar (or dirham) amount into a security regularly, shares or units are purchased at varying prices and in different amounts each time. Therefore, an investor may buy more shares when prices fall and fewer units when prices rise. As an automated strategy, DCA works in investors’ favor by reducing the impact of price volatility, and with it, an investor’s risk. The average cost of the investment decreases over time and the process cuts out the emotions associated with market highs and lows. SIP approaches therefore suit all levels of investors.

For investors, there are many benefits to choosing a SIP approach, particularly when it comes to investing in mutual funds.

Automatic investments: Perhaps the biggest advantage to taking out a SIP is that there’s little more to do than deciding your preferred asset or instrument, how much you want to invest and the frequency at which you want to make that investment. Typically, SIPs in the UAE are funded through direct debits, so you just need to make sure there’s enough money in your account on the date the investment goes out. In that sense, the investment becomes automated.

Get started with small amounts: With a SIP, regularity matters more than the amount of each individual payment. Many plans begin with investments as low as $100, but this varies according to the plan and the financial institution.

Build financial discipline: SIPs can help investors in the UAE develop the habit of saving over a sustained period without the need to track market movements or worry about share prices.

Lower overall cost of investments: Statistics indicate that you will usually arrive at a lower average cost per unit than if you were to invest large amounts sporadically – again, because DCA makes market volatility work for you.

Reduced investment risk: Buying at regular intervals can help reduce risks associated with one-off market entries – such as may occur when prices drop substantially within a few weeks of making a lump sum equity purchase. When the same investment is spread over several weeks or months, the price averages out, minimizing the potential impact of sudden movements.

Potential for long-term gains: Studies show that any downside to holding equity SIPs usually drops to zero over a period of about eight years. After that, SIPs generally yield positive returns and may even generate wealth, depending on the underlying asset chosen. However, it must be noted that investors may find that other asset classes perform better, such as property, although these may require a larger outlay.

Aim towards a goal: SIPs are an excellent way to work towards your financial goals one step at a time. Some investors hold different SIP accounts for separate goals, with the aim to cashing in on each at a different point in the future.

Liquidity at any time: Unlike many other asset classes, SIP units can be sold at any time. In that sense, they can serve as an emergency fund – although this liquidity may come at a price.

Despite their role in building a secure savings program, SIPs aren’t for everybody. Indeed, formal SIPs come with several stipulations.

SIPs require at least 3 years of commitment: Without a long-term horizon, investors may not see significant returns with a SIP approach, particularly in the equity market. In fact, when it comes to other kinds of investments, your opportunity cost may be higher over the same period.

Missed opportunities: Regular investments may leave you with no cash to take advantage of buying opportunities or bargains that arise unexpectedly – leading to potentially lower profits in some cases.

Low risk but low gains: SIPs are structured to moderate risk over several years. At the same time, however, investors entering a market at a historic low may benefit from a lump-sum approach to maximize their profits.

Limited control: As a passive investment strategy, SIPs are designed to automate investment. At the same time, however, you’re investing in a predetermined fund or asset class. If you want to switch to a different fund, or change the amount going in, you will need to close the first SIP and open another.

It’s worth considering your income situation before committing to a SIP. For anyone with a steady job and a regular salary, a SIP is a great way to set aside money before it’s spent. On the other hand, when your income is more sporadic, you may want to avoid being tied down. In such cases, sporadic investments may make more sense. However, financial experts believe that SIPs may work better for people with irregular income streams, because of their role in building financial discipline.

Overall, the pros of a SIP outweigh the cons in most cases. But SIPs aren’t for everyone, so discuss the pros and cons with a financial advisor before deciding.

This article is part of a series of financial educational features. Share it with family members or friends who could benefit from a disciplined approach to personal finance.

Citibank, N.A. - UAE Branch is licensed by the Central Bank of the UAE as a branch of a foreign bank.
Citibank N.A. UAE is licensed with UAE Securities and Commodities Authority ("SCA") to undertake the financial activity as a Promoter under license number 602003.

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Keith J Fernandez is an editor and communications professional who advises on marketing content strategy. He is based between the UAE, the Netherlands and India and writes about business, technology and personal finance.

This article is intended to provide general information about finance and investments and does not replace or should be taken as professional financial advice. The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article except information on Citibank N.A. – UAE products referenced herein.
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