Home / Money / Personal-finance /  Did you know: SIPs ensure investing discipline, not assured returns

Many mutual fund advertisements talk about the virtues of systematic investment plans (SIPs). An SIP is a way of investing regularly in mutual funds.

That it is a good way to invest in equities—through equity mutual funds—is a given. It ensures discipline (you invest a fixed sum regularly) and takes away the worry of trying to time the market.

Mint Money also recommends investing through SIPs. But that does not mean that it guarantees good returns.

An SIP is good because it ensures investing discipline, not because it guarantees returns. There are a few other misconceptions about SIPs that you should know.

Selection is the key

An SIP is a method of investing. It is important to know which scheme you are investing in. While selecting a fund, ask questions like: does the scheme suit your risk profile; is it managed well; and is it a consistent performer?

If you invest in the wrong kind of scheme, it will reflect in the returns over the long run. For example, if you had invested Rs10,000 every month in an equity scheme of a mid-sized, public sector fund house since January 2010 till date, you would d have made about Rs12.15 lakh or a return of 11.60%. If you had invested in a large-cap fund of a large foreign fund house, you would have got Rs12.70 lakh: a return of 12.88%.

If you invest lump sum in an equity fund and redeem it after a year or two, you may or may not make any money. In fact, in such a short span the chances of making a loss are quite high. But if you invest through an SIP, your chances of making a loss, or very little return, go up. This happens because, in an SIP, you stagger your investments over time and your corpus does not work for the entire tenure.

For instance, if you invest Rs10,000 every month, for 2 years, you would have invested Rs2.40 lakh. Of which, Rs1.20 lakh was deployed in the second year only. So, if your money gets to work for only half the period, you have to stay invested for a longer term to get the returns.

Market cycles

To get the most from your SIP, it’s important that you stay invested through the market cycle. In rising markets, an SIP buys fewer units, and in falling markets it buys more.

Financial advisers say that the trick in an SIP investment is to invest through the market cycle and not just in rising or falling markets. In rising markets, for instance, lump sum investments outperform SIPs.

Between June 2013 and January 2015, when equity markets went up by 42.46%, Franklin India Bluechip Fund went up by 30.74%. If you had an SIP with it (say, Rs10,000 a month), you would have got a return of 15.94% in this period.

However, if you had started the SIP in December 2007 and stayed invested till date, you would have got a return of 13.59%. The return with the lump sum option, in this scheme, would be 8.73%.

Top up anytime

SIPs are about fixed regular investments. But if you come upon a lump sum, such as a bonus, you can put that too in the same account.

You don’t need to open another account or folio just for the lump sum.

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