Yet, I believe at least some of what is happening may not work to the advantage of the retail investor. And let me say upfront that some of these ideas are being drowned out by the big returns posted by mutual funds these days. However, in the medium to long term they could cause quite a bit of damage to retail investors’ portfolios. Here goes…
I will start with the obvious – the infatuation with systematic investment plans (SIPs). Recently I wrote, “oftentimes SIPs are nothing but tools to obfuscate the incompetence of the investment advisor/decision maker.” I strongly believe this.
Think about it for a moment. SIPs are only a means to an end. They are a way of making an investment, not an investment in themselves. So before one has an SIP, there needs to be a clear understanding of where the money is being invested and whether it fits into the overall plan.
What we do know, or can guesstimate from the data, is that a lot of the money flowing into mutual funds is going into small cap, mid cap and thematic funds. Any experienced person will tell you this does not smell right. Every time this has happened in the past, investors have gone on to lose some serious money. Yet, the mutual fund industry continues to pat retail investors on their backs for the wonderful SIP numbers.
Another big issue I have with SIPs, and which underscores the point about incompetence, is related to the simple idea of “be greedy when others are fearful, and fearful when others are greedy”. The SIP idea is good to instill self-discipline and prevent you from overspending. It’s not necessarily a great idea to make you a successful investor. To do that, you need to save every month, of course, but you need to double down when there is fear around, and perhaps hold back your money when there is greed in the air.
Having an SIP and forgetting about it may work out for you if we are in a unidirectional 10-year bull market. If not, you really need to think about how you manage your SIPs.
Vivek Kaul, an economist and columnist at Mint, has cited data that shows SIPs don’t work out for nearly half of investors:
In fact, data from AMFI — the mutual fund lobby — as of 30 June 30 shows that a little over half of the money (51.4% to be exact) put in stocks by retail investors through the mutual fund route stays invested for just over two years.
And yet, all mutual funds will push the idea of SIPs, even if the money is going into the wrong funds at the wrong time.
Every time I see an SIP being pushed it just reinforces my belief in the incompetence of the system to help the retail investor make the right decision.
This brings me to another SIP-related point that shows something is not right. It has to do with small cap funds. Here the question that comes to mind is why small-cap mutual fund schemes did not stop taking lump sum investments when the markets had rallied beyond a point of rationality. And why stop at lump sum money? If the SIP money had become so large that it was becoming difficult to deploy, funds should have simply paused that, too.
Truth be told, a few small cap funds did close their doors to new money. But as an industry, could they have done more? Do they really expect to meet the expectations of investors when accepting money at these all-time-high levels?
I think in time we will know how fund managers managed to park all these thousands of crores month after month in small cap stocks, and whether it made any sense at all.
Meanwhile, let me take you to a key point I have been making for some time. It appears that a large chunk of investors, having been fed the idea that small caps are the best place for big returns, have overexposure to these funds. We know in the long run that this will be problematic. Why? Many of these investors won’t be able to ride the rollercoaster that small caps tend to be! You see, we are still near the top of the market. The sins that were committed in the build-up to this peak will only be revealed in the months and years to come.
Before I conclude, I have three suggestions to offer.
First, for the regulator, Sebi. Financial planning and asset allocation require lots of hand-holding. India’s micro army of 1,307 registered investment advisors, of which I guess only 50% to 60% are active all the time, is not enough at all. Until this is set right, investors will look to unregistered entities for “tips”. Worse, registered entities will push SIPs they don’t need. That’s not good at all.
Second, for mutual funds. As a mutual fund investor myself I can tell you that they are indeed sahi, but only if the planning is right and there is a product fit. So, while you spend all this money on advertising, set aside some to warn people when something may not be right for them, even if it’s bad for business in the near term. The infatuation with SIPs, some of which is misplaced, is where you can make a start.
Third, for the investor. It’s critical that you understand that financial planning and asset allocation are key to long-term success. Either you become good at it yourself or find someone you trust who will do it for you. Buying a product here or there, or being sold an SIP every now and then isn’t going to do much for you. It could actually preclude you from achieving your long-term goals.
Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.
You should always consult your personal investment advisor/wealth manager before making any decisions.