Let us assume I have been investing via SIP in a fund for 5 years. Now when the fund is switched (ignore capital gains for now) to a Direct Mutual Funds it would be purchased at latest NAV and not the average NAV that the SIP achieved over 5 years period (would consider the avg NAV to be lower than the latest NAV). It is as good as Lumpsum investing on latest NAV, so is the compounding effect lost?
If yes, then would it be better to redeem total accumulated amount from regular plan and again stagger it monthly (over an year?) in the direct plan? This sounds rather inefficient, please let me know if I am missing something elementary here regarding switch from Regular to Direct plan. Thanks.
Droid-By switching to DIRECT, your compounding will not affect. But defenitely there will be a difference of compounding from regular to direct once you switch to direct. This difference may be around 0.5% per year.
Thanks for the reply, could you please expand a little bit? How will it not affect compounding when the switch makes it effectively a lumpsum investment and timing does matter for a large amount that was accumulated all the while till the switch occurred.Also, the 0.5% is regarding the benefit of the regular-direct difference?
Basu-For equity market whether your investment is SIP or lump sum, it does not matters. Let us say you are capable of investing Rs.10 lakh of SIP per month for 20 years time frame and another guy who are not wealthy like you but have some lump sum of Rs.10 lakh which he want to invest for 20 years. Then whether market treat both the investments separately? NO…At the same time, in equity market timing make sense. But which right time to invest? ONLY GOD KNOWS that. The only funda that works is invest for long term. Hence, investing lump sum for long term which already accumulated will be again into market for long term. In such a situation, how can it be out of compounding effect? You will not get the compounding effect only when you keep it with you without any earning on such accumulation. Yes, the difference of 0.5% is related to regular vs direct.
Thanks for the clarification and your time. Actually tested it out – took 10 year nav for a fund and switched entire amount after 5 years and compared with the one not switched – and the results are same.
Droid-How the dust is cleared NOW 🙂