SIPs are a hit. Congratulations! Now, here’s the bad news

SIP contribution stood at an all-time high
SIP contribution stood at an all-time high

Summary

  • SIP is a means to an end. What it is NOT is a solution, which many investors think it is

Whenever I see a tweet or a bite on the telly congratulating retail investors for the huge success of SIPs (Systematic Investment Plan), I am amazed.

You see, these congratulatory messages only talk of the huge numbers of SIPs that are active today, and how they are powering the stock market. In good measure, they also take on a form of nationalism. Flows are now driven by Indian retail investors, not by foreign investors. Yea!

If you think about such messages, you will notice one key thing right away.

They don’t talk of actual returns made by retail investors.

If at all, such posts typically pick some random 10-year or 20-year period and show off how money would have multiplied in stocks.

What they don’t show is that most retail investors don’t really continue with their SIPs for long.

Also, many investors are disappointed with the performance of their SIPs.

We will come to why this is so in a moment.

But first, I want to ask you a simple question – What is an SIP? No, I did not mean the full form, which you well know.

You see, SIP is a means to an end. What it is NOT is a solution, which many investors think it is. And, this is the key reason why investors are often disappointed with the performance of their mutual fund portfolio.

What you invest in is a function of your goals and risk profile. When planning to achieve your goals, you build a financial plan and allocate your assets in line with that. Then you go about investing.

And as part of that plan if you need to invest in the stock markets, via mutual funds, two critical factors come into play.

Which mutual fund schemes should you invest in?

Should you do a lumpsum investment or an SIP?

Both are easier said than done.

In my view, the easy way out of this problem is to do an SIP.

It’s almost like the focus on doing an SIP takes one’s eye off the bigger decision – which scheme to invest in.

Also, the idea of investing consistently a fixed sum of money has more to do with the fact that induces a saving/investing discipline in the investor than what is perhaps best suited for investing in a scheme at that moment.

The point I am making is that while we cannot time the market. What we can definitely do is invest more when markets are cheaper than historical averages; and invest less when they are more expensive. It’s both simple and easy.

Let’s take an example of what’s been happening in recent months.

A chunk of the money (lumpsum, and SIP I presume) is going into smallcap funds.

Now, my guesstimate on this is that most investors are already over-exposed to small-cap funds and hence should scale back. But the idea of the SIP clouds this approach. It makes them believe that the SIP solution will take care of achieving their life goals.

What is worse, most retail money is going into small-caps at these elevated levels, which basically means, future returns will be suppressed to that extent. But there again the idea of the SIP solution makes them believe that does not matter anymore!

This leads me to believe that oftentimes SIPs are nothing but tools to obfuscate the incompetence of the investment advisor/decision maker.

The end result? In a couple of years from now, the mutual fund investor is not seeing much in terms of a return delivery. So, what does he/she do?

Here’s Vivek Kaul, economist and a Mint columnist:

In fact, data from AMFI—the mutual fund lobby—as of June 30, 2023, shows that a little over half of the money invested by retail investors in stocks through the mutual fund route stays invested for a period of just greater than two years (51.4% to be exact).

So much for SIP being a solution to achieving long-term goals.

The ideal process should be:

First, draw up a financial plan, and the corresponding asset allocation to meet your goals

Second, start investing in line with that. When it comes to equity mutual funds, be sure to get your schemes right, and that too in the right allocation.

Furthermore, temper your investments in keeping with overall valuations. If markets are very expensive, invest the least you need to. When markets are cheap, top it up with additional SIPs, and even lumpsums if possible. (Most gurus who advise SIPs will tell you they made their wealth doing exactly this – investing a lot when stocks were cheap).

Mutual fund flow data for recent months shows that most investors are failing on both these counts. My advice – take corrective action now.

Having taken you to one extreme about SIPs, I must temper my view somewhat.

You see, if you have selected your schemes well, then an SIP may not be a terrible idea. Especially if you are not a disciplined saver.

But even there, I would suggest a more discretionary approach to allocations as against a fully automatic approach. For this you need a trusted advisor.

Here’s mutual fund veteran S Naren, of ICICI Mutual Fund, one of the few fund managers who calls it as it is, in a recent interview to MoneyControl:

If you had done SIPs between 2006 and 2013, it would have delivered no returns. When I tell this to mutual fund distributors, they don’t even think it is possible. Where you invest is very important.

If your advisor is among those who do not think this “zero-return" scenario is possible, or who do not select where to invest very carefully, then perhaps you need to do a rethink! (I recently wrote about “firing" Investment Advisors here…)

That brings me to my final point.

SIPs are good for the mutual fund industry. That point is not debatable.

That’s why I suspect big SIP numbers are lauded…but almost no one is questioning the underlying mis-selling associated with it.

So, the next time a fund manager, mutual fund advisor or anyone pats you on the back for being part of the big SIP wave, take a pause. And be sure you are not the victim here.

Note: A shout-out to SEBI. If SIP data can be made available at the scheme category level too, it could help all of us to be even more precise in our analysis. Thank you.

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.

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