SIP or Systematic Investment Plan is regarded as the most efficient and easy method of investing in equity markets. It has been noticed that investors who put their money in mutual funds via SIP, 1 to 2 years ago, have not received good returns. The value of total investment for some investors has actually declined in comparison to the original investment. Several investors have gotten yields that are lower than that offered by a savings bank account. The average two year returns of SIP in December 2016 were 2.88 percent for equity mutual funds.
The above does not indicate that SIP method of investments need to be reevaluated. The very first thing that needs to be cleared is the fact that SIP is not an investment option but just a method of investing. SIP is similar to recurring bank deposits with the main difference being that SIP is speculative and based on the dynamics in the market while recurring deposits come with fixed term and guaranteed yields.
Poor returns of SIP investment in equity funds can be attributed to investment in an underperforming MF or a bear run in the market. SIP is not responsible for bad or good returns as that is dependent on the performance of the fund.
Losses and SIP
Positive returns are not always the outcome of SIP investments. SIP helps in averaging out the costs, but it does not offer assured capital protection. SIPs only help make sure that you purchase at different market conditions and levels. For example, if a 3 year SIP investment was made in Jan 2006 with the end date being Dec 2008, then that investment will be loss making one as the markets attained new highs in 2006/07 but nosedived in 2008. Comparatively, those who went for a 3 year SIP in Jan 2008 did make good profits as the markets experienced an upturn in 2010.
Volatility and unpredictability is in the very nature of equity markets. This kind of unpredictability is what permits investors to buy more units when their costs are low. Investors need to have a long-term outlook of performance in different market cycles to gain a better understanding about how SIP helps accrue wealth. Short-term volatility is just a temporary phenomenon and it shouldn’t divert you from your long-term investment goals. It may be noted that the returns of the past 10 and 15 year SIP investments in equity mutual funds have been profitable and generated wealth for all good investors.
There is a general lack of trust about the sustainability of equity yields. Bad experiences and market instability prevents investors from venturing into the market. Hence, they do not make full use of the chances to enter the market during the early stages of a rally/rallies.
A careful evaluation will help you realize that investments in equity MF offer the best returns when it is undertaken systematically with a long-term vision. Such an approach will help overcome volatility of markets in the short and medium term, while systematic planning can help make the right level of investments at specific market settings and conditions.
The psychology of SIP
Real value of investment via SIP is dependent on psychology and not on math. It is important for small investors to remain invested in their SIPs through tough times to be able to make profits. SIPs offer the easy and simple option of regular investments without the added worry about when/where/how/etc about investing or not. We tend to defer our investments in equity during times of market unpredictability and thus lose out on opportunities; SIPs play a role in instilling disciplined investment during such times.
Another asset of SIP is that it matches the investment of the small investor who can put in only small sums of money, such as INR 5000 to 10000, from their monthly salaries. The sum of all such investments is then invested in a portfolio, which normally could not be afforded by a small investor.
The art of SIP investing
Common investors usually get second thoughts during times of market downturns and end up redeeming their SIP investments too early. Lakhs of investors redeemed or discontinued their SIP accounts during the volatile markets following the 2008 global financial crisis. Small investors typically stop their SIPs when returns become negative. Doing so is a mistake as they do not understand that their equity MF investments are actually purchasing at reduced prices during such downturns.
The right attitude to SIP investment can indeed make you rich. It is always a safer better choice as compared to other investments. SIP offers a chance to make small monthly investments, instead of large lump sum investment. It thus helps create savings and generate wealth for small investors in the long term.
It is important to remember that even though SIP equity MFs are good bets, investors should periodically review the fund performance to ensure that they are not investing in under performers. SIP does not mean invest and forget.