They get you invested, automate that investment and keep you building wealth for years
At around ₹5.65 lakh crore, Mutual Fund Systematic Investment Plan (SIP) accounts for 15% of the total mutual fund assets (AUM) under management.
This is up from the 13% stake in April 2021. The SIP AUM has almost doubled between April and December 2021 at the rate of the entire mutual fund AUM, with the monthly SIP amount exceeding ₹10,000 crore last September.
It’s all welcome! SIPs are a great way to invest and build wealth. But along the way, SIP, its purpose and benefits have become somewhat opposite. So, here’s putting SIPs in perspective – what they are and how they actually help you.
committed investment
In SIP, you keep investing money in the fund at regular intervals throughout the year. You already knew this. But what you’re discounting is probably its real advantage.
The biggest advantage of SIP is that it ensures that you invest every month.
This ensures that you don’t overspend and don’t skimp on saving. It doesn’t give you an excuse to put off investing for the next month. For salaried people, especially, with monthly income coming in, SIP is the best way to ensure investment.
Moreover, by investing small amounts every month, SIP allows you to slowly and surely build wealth.
It is tough for most of us to reach big financial goals with lump sum investments! As your income increases, increasing your SIP amount – and AMCs and investment platforms offer several easy ways by which you can increase your SIP amount – will improve your wealth-building and see if the savings step up with the increasing income. Walks step by step.
not treated
But over the years the emphasis on SIP has undermined this fundamental advantage and exalted others, giving SIP an identity that is often misunderstood.
Take advantage of ‘average cost of Rs. In fact, average cost reduction does not happen easily. To really reduce the average cost, two factors are needed. First, the markets must correct. Second, you need to continue (or stabilize) that market downturn long enough to be able to make substantial additional SIPs at those low levels, such that your overall investment cost is lower.
When you run a SIP through a bullish market, your costs are actually going up because you are continuously investing at a higher level. The longer the rally, the more your cost will move upwards and the less cost correction you need to make.
The longer you run your SIP, the more likely you are to need a longer market fall than average, as your investment amount itself is likely to be larger.
Next, consider the benefit that SIPs are the solution to investing at the wrong time. Yes, SIP helps in reducing the risk of investing at higher levels when stocks are peaking, as SIPs allow investing at different NAVs and market levels. But, it often turns into the assumption that SIPs prevent losses or that they ensure high returns. It doesn’t happen.
SIP is a way of investment. You do not invest in SIP. You invest in a fund through SIP. Your investment is the fund. Your return will be of the fund. If a fund is unable to perform well, investing through SIP will not improve that return. If the market is correcting, so is your fund and your investments.
To take the point further, you don’t have ‘SIP funds’ or ‘Lumpsum funds’ for the same reason. SIP and lumpsum are only ways of investing in a fund and are not investments in themselves. You only have good funds that are worth investing in, be it through SIP or lump sum.
Equity markets have been in turmoil for almost two years now, and there is no long corrective period before that, it is important to know what are SIPs and what are not. Keeping high or faulty expectations from your SIP is likely to leave you disappointed, you will lose faith in your investments if the market gives relief this year.
This can lead you to stop SIP, a thing you should not do. You need to run your SIPs through market corrections to truly get their ‘average’ effect.
not always necessary
False risk and average return also apply equally to all funds, making SIP the only way to invest. No, look again what SIPs do.
SIP reduces the risk of high investment. But this high risk of investing at the wrong time is mainly only in equity funds (and aggressive hybrid funds). Only the stock market can fall sharply or stay down for a long time. All debt funds (other than gilt funds) and hybrid categories other than aggressive hybrids have low or very low risk.
Similarly, it is only in equity funds/hybrid aggressive funds that you can convert market volatility to your advantage by investing in dips and low cost. In the absence of that volatility, you get no average profit; In such funds, it does not matter whether you invest through SIP or lump sum as long as your time frame is right.
So, remember the basic benefit and necessity of SIP, which is that it makes you invest, automates that investment, and keeps you building wealth over the years. Don’t focus too much on other aspects that may not apply and can only confuse or frustrate you.
(The author is the co-founder of Primeinvestor.in)
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