Investing in MFs via SIPs good bet, but…
Systematic Investment Plan or SIP, as it is popularly known, has become prominent way of investing for the retail investors.
Systematic Investment Plan or SIP, as it is popularly known, has become prominent way of investing for the retail investors. There are multiple reasons for the success of SIP of mutual funds (MF).
This stems from not just the plethora of literature being written in the investing circles, the advertising campaign from the mutual fund association (AMFI), the use of technology but due to the ease of operations.
Ever since the electronic clearing instruction system was introduced in the banking system, it turned out to be a boon for the MF investors.
The integration of National Automated Clearing House (NACH) with the MF investments for the future investments has further advanced the penetration of SIP into the masses.
This added the already ease of starting or stopping a SIP and with technology platforms, it began to be treated as another mundane bank transactions by people.
The recent escalation in the numbers especially since 2017, has brought in more newbies into the system which is again mostly due to the word-of-mouth from the earlier investors who have experienced the fruits.
The efforts of the newbies are yet to bear fruit due to the shorter tenure they have participated in the markets and so are prone to some myths about SIPs.
Many of the new investors are hooked to the idea of SIP but rarely know what their investment is all about.
There are a huge number of first-time investors who would answer that they are investing in SIP without knowing which fund or from which Asset Management Company (AMC) or fund house it's from.
I have also encountered many investors who assume that the SIP is done with the bank itself as the money is deducted from their bank account. Despite, the exercise of investing an equity fund through SIP is good, not knowing what that investment is another issue which could lead to the earlier experience akin to ULIP (Unit-Linked Insurance Plans) of insurance companies.
The first and foremost thing an investor should be aware is that SIP is only a method or mode of investing and not an investment avenue. They should be aware of which fund the SIP is feeding into and also more details like, the fund objective, the risks involved, the expense ratios, etc. need to be aware of.
One may not benefit much through a SIP, if it ends up in a wrong fund and here when I mention about wrong, I mean not just about performance of the fund but if the fund does not match with the risk profile of the investor.
The other frequent question I have come across is to continue SIP when the markets are not doing well. The recent volatility in the stock markets have impacted fund performances across the industry, many of the new investors are wondering if they should continue to fund their SIPs.
When some of these investors got on to this fad, the markets were rising and so there has been a higher positive notional return and with the markets in doldrums, the investment returns are not attractive or in some cases is negative.
The key for equity market returns is not timing the market but time spent in the market. SIP as a mode helps achieve this perfectly by cost averaging the asset. With the regular contributions through SIP, the investor could purchase the asset (units of a MF) at various levels thus averaging the cost of acquisition of these assets.
The investor would end up acquiring higher number of units when the markets are down which could eventually help to make higher returns when the tide turns around. So, bear in mind that it's not advisable to stop SIP during bear phases of stock market.
Though, the very idea of SIP is to resist from such temptation, the ease of operation is again responsible for many attempting to discontinue during these testing periods.
The other doubt that is prominent in the minds of investors is about the quantum and frequency of the SIP contribution. The amount per installment, the number of installments and the frequency of the installment is actually arrived from backward calculation.
This is why one could take help of an advisor to define their goals, identify a fund which suits this objective or a portfolio which reflects these goals thus materialising into the amount and frequency.
There's no such thing as better returns through higher frequency but as I mentioned earlier, the timeline of the goal will define the frequency of investment.
Also, there is a crave for tinkering the simple SIP with tweaks with variable contributions. For instance, there's a variant available for the SIP contribution to increase during a falling market and vice versa.
Though, it looks attractive in theory, it could be riddled with operational problems like a prolonged decline in markets might upset the investor's budget as it ploughs more of the savings which is unplanned.
Similarly, I'm not discouraging investors to be a little inventive. For example, a variable SIP which gradually increases the contribution by a fixed percentage each year or at intervals of years could be beneficial particularly for long-term goals like retirement and children's education.
But, ideally stick to the simple SIP in a fund that suits to your requirements and for healthy gains make periodic reviews.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])