Home / Opinion / Online-views /  Expense Account | When SIPs become cool

At a wedding reception recently, a friend’s daughter, who just got her first job, wandered over to where us oldies were huddled. Aunty, I, like, wanted to chat about this SIP (systematic investment plan) thingie? Whenever you have the time, whatever? Another friend, not known for being sane, who lives consultancy cheque to consultancy cheque and regularly blows up her bank account on mad-hatter trips, worked with me over three afternoons to set up her SIP accounts through her online bank account. “I just totally have to get this SIP thing going—it is so cool!"

A mix of things has led to SIPs suddenly finding themselves part of the cool set. More than 10 years of regulatory work on cleaning costs, improving transparency and allowing technological innovations has resulted in much of the conflict going out of the mutual fund business. A small army of financial planners and independent financial advisers (IFAs) has worked hard on making investors understand the benefits of regular long-term investing. Asset management companies (AMCs) have got their advertising right finally and are pushing the SIP concept rather than an esoteric pie in the sky dream of future wealth. One ad makes the investor think of the SIP as a reverse equated monthly instalment (EMI). Another puts people like us, who are using SIPs to invest, in the focus. And last, the investor who burnt her fingers in direct stocks, bad insurance products and multi-level marketing (MLM) schemes, is finally ready with managed expectations to look for a way to invest for the long term in a product that does not implode.

If you have been out of the conversation and suddenly find SIPs to be the new cool thing, here is what you need to know. An SIP is nothing but a way to invest regularly in a mutual fund. It is another term for a rupee cost averaging strategy. Remember, you are choosing one mutual fund scheme (or many), and using your monthly savings to invest in your set of schemes for a year or more. The logic is this: we generate income at regular intervals and need a regular way that is on auto pilot to invest it. An SIP provides that way. Remember, an SIP is just the vehicle that takes you to your fund. It is the route you take. It is not the product itself. The product you buy can be either an equity mutual fund, or a debt fund, or a gold fund or a balanced fund that invests in two or more of these assets. If anybody is promising you a 15% return from an SIP, she is lying. Look at an SIP as a recurring deposit, but instead of a fixed deposit, you are investing in a mutual fund scheme.

So, why do SIPs work? Because this method of regular investing does two things for us. One, it binds us to a monthly investment outflow for a period of time. Our regular incomes are on a monthly schedule but we think of investments in a lump sum (when the market falls, when I have more money, when the time is right). An SIP simply matches the income flow with an investing rhythm. Many people begin testing waters with a 12-month SIP. After a year, they do 24 months, and once they’ve lived through a market crash, they move to a perpetual SIP mode mentally. They may change the scheme if the one they had an SIP in underperforms, but the SIP simply moves to another scheme. The funds you invest in will change, but the route will remain the same.

Two, a regular investing rhythm allows you to use a strategy called rupee cost averaging. This investing strategy gets you to commit to a certain amount of money that you will invest each month in a market-linked product, like stocks or an equity mutual fund. When markets go up, you buy fewer ‘units’ of the fund. When they go down, you buy more units. Your average price improves than if you were choosing to invest a large amount on a particular day. Lump sum investors run the risk of getting unlucky and investing when markets are too high. Anyhow, if you invest for sufficiently long (say, 10 years) these highs and lows also don’t matter as much. A story by my colleague, Lisa Pallavi Barbora, points this out (read it here: http://bit.ly/1VnytXm ).

Do SIPs work? A recent story by another colleague, Kayezad E. Adajania, says they do (read it here: http://bit.ly/1WzuQgH ). They are a great route to regular long-term investing and if you pick the right funds, you do really well. How do you pick the ‘right’ funds? You can pick out of the Mint50 list, the investment-worthy funds that Mint curates. Or, you can look at the four- and five-star funds from Morningstar and Value Research. You could look at funds that do well in all the three lists to remove any bias that one listing may have.

My gut feeling is that we like SIPs not because we are getting an average price, but because there is a way to invest that matches our income rhythm and it is easy to set up and maintain. It is the ease of on-boarding and staying on that is the winner. Here is a prediction. If the industry does not mess it up by encouraging sharp sales, SIPs will be to the next generation of the Indian mass affluent what fixed deposits were to our parents.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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