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Business News/ Mutual Funds / News/  There is a way to make SIPs work in tough times
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There is a way to make SIPs work in tough times

The monthly SIP number has dipped below ₹8,000 crore for the first time in almost two years. Net inflows into actively managed equity funds also slid to a four-year low. Mint explains what is happening and why.

Photo: MIntPremium
Photo: MInt

The monthly Systematic Investment Plan (SIP) number has dipped below 8,000 crore for the first time in almost two years. Net inflows into actively managed equity funds also slid to a four-year low. Mint explains what is happening and why.

Why has the monthly SIP flow dropped?

Monthly SIPs rose from 3,122 crore in April 2016 to over 8,000 crore in December 2018. They held above that level until June 2020 when profit booking in the post-covid-19 market coupled with layoffs and pay cuts in organized sector pushed them back down to 7,927 crore. An SIP involves investing a fixed amount each month in a mutual fund. The monthly format fits well with the salary that many investors receive and was popularized greatly by the #mutualfundsahihai campaign launched by the Association of Mutual Funds in India (Amfi). However, their flow is ultimately tied to market movements.

How well have SIPs performed over years?

A sluggish economy and market over the past 2-3 years have pulled down SIP returns. The economy was weak even before the covid-19 outbreak hit. A 10-year SIP in a Nifty 50 Index Fund would have yielded 8.46% (CAGR). This has fallen to 5.75% over the past five years and just 1.31% over last three years. Long term investing is drilled into SIP investors, but there are limits to how long investors will accept low returns. Although SIPs in high performing funds would have given higher returns, actively managed funds on average have not been able to beat indices over the past 2-3 years, especially in the large cap space.

Can overvalued markets impact SIP performance?

An SIP is designed to reduce the risk of investing at market peaks. However, if markets continue to remain overvalued for the entire duration of an SIP and subsequently correct, this can impact SIP performance. An SIP works best in falling markets when you are able to buy more units. It goes into reverse in rising markets, eroding the benefit of staggered purchases.

Sudden dip
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Sudden dip

When should one pause or stop SIP?

The pandemic has brought in a lot of uncertainty laid emphasis on the importance of having emergency money before any money moves to investments for other purposes. Accordingly, there are some reasons for pausing your SIP. The first is to create emergency corpus. The second is to take stock of your asset allocation and alter your SIPs accordingly. The third reason to pause can be the overvaluation of the market. However, experts note that the market is forward-looking with variables at play and rebound should not be a reason to stop SIPs.

What else can one do to reduce risk?

SIPs are a tool of risk reduction because they average out your purchase price. An equally important tool is diversification. This means you hold different asset classes such as debt, gold, and international equities, in addition to your SIPs in equity mutual funds. You also rebalance between the asset classes based on market conditions. For example, if the market has corrected, you can switch more money to equity SIPs. If the market is overvalued, you can shift more money to debt funds.

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ABOUT THE AUTHOR
Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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Published: 09 Jul 2020, 10:24 PM IST
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