SIP even if you have the cash

The reason you want to invest in a mutual find via a SIP is simply to average out your costs. Smart strategy given the uncertainty of the stock market. But what if you have cash sitting idle in your bank account? My opinion: its still worth opting for the SIP.

However, rather than leave the money in your savings account earning a measly 3%, put it in a few staggered fixed deposits. Stagger them so that they mature in 3, 6 and 9 months so that you can get better than 3%.

The only irritant here is that in most cases the banks offer the best rates at 3 months 16 days, 6 months 16 days and so on and not 3, 6, or 9 months. The reason for this is that the banks would like to incentivise such deposits so as to give them a bit of a buffer to get back the money they've lent out. A very good explanation for this can be found on the TOI here. How it works exactly is a bit of a mystery to me as I am sure lenders and borrowers do not synchronise their transactions. What this certainly means is that on an average most deposits will be for longer terms than the borrowings.

Assuming this is the case and assuming you'd like to invest Rs 10,000 a month over a year, you could:

1. Leave 40,000 in your savings account. This takes care of the first 4 months.
2. Deposit 30,000 for 115 days (or closest best rate).
3. Deposit 30,000 for 6 months 16 days.
4. Deposit 20,000 for 9 months 16 days.

The interest rates offered by HDFC Bank for these periods (as on 15 Jan 2011) would be 3%, 5.5%, 7.75%, and 7.75% respectively (Latest HDFC Rates available here)

Smart personal finance should not be maximising potential returns and taking unreasonable risks but about getting reasonable returns while taking reasonable risks. Putting in a large investment in one go is taking an unnecessary risk given that the stock market may move adversely at any time. Its best to take a safe FD route while still investing in the SIP.