Systematic Investment Plans - SIPs -
Do not be swayed by what Mutual Fund Agents
and
distributors say..!
Systematic Investment Plans (SIPs) work wonderfully in
helping investors get great returns from equity based mutual funds.
However, a major threat to investors being able to use
this method of investment is the attempt by mutual funds to fine-tune and
optimise SIPs. It sounds strange, but it's true. Let's see how.
Earlier in this series of articles, I had written about
how SIPs were the best feature of mutual fund investing.
Through an SIP, you can invest a regular amount in a
fund. It is typically, an equity fund, although SIPs are available for
practically every fund. That's all you have to do, maths and psychology take
care of the rest.
I had pointed out two important ways in which SIPs help
you save more and get higher returns.
First, there's the math. When you invest a fixed sum
regularly you are allocated more units when the markets are low. It's like
buying anything else you will get more for the same amount of money when the
price is low.
However, when you eventually sell it, each unit gets you
the same price. This enhances your returns.
Second, there's the psychology. When the markets turn
downwards, many investors don't invest, even though that is the best time to do
so.They are wary of further drops and choose to wait to invest after the
markets have reached the bottom.
The reverse is also true. When the markets are too high,
they don't invest, waiting instead for the markets to dip. The recent months
have seen a lot of such behaviour.
Obviously, these people are now torn between regret and
stubbornly waiting for that dip to occur.
SIP investors tend to be immune to such impulses. Whether
the markets rise or fall, the SIPs continue, simply because they are automatic
and it takes some effort to stop them.
Sooner or later, as the markets go through their usual
cycles, pushing up the value of investments, SIP investors start making good
money. This teaches them the value of continuing with their SIPs in response to
market conditions.
This is the beginning of a virtuous cycle, creating a new
generation of investors who understand the value of regular investing.
The combined impact of the maths and psychology is
amazing. Here are some numbers from a little experiment that I quoted earlier.
I selected four equity funds that are old enough and calculated what would have
happened if an in vestor continued investing a small SIP amount of Rs. 5,000 in
these each month for 20 years.
The four funds yielded Rs. 1.29 crore, Rs. 1.85 crore,
Rs. 1.21 crore and Rs. 2.05 crore
respectively.
Keep in mind, that the total investment made in each case
was a mere Rs. 12 lakh .
However, it's very easy to sabotage this, and that's
exactly what many mutual funds are actively trying to do. They are promoting
the idea that a plain and simple SIP is not good enough and that investors must
do something more.
They suggest adding various embellishments to the SIP to
make it better.
Generally speaking, these `enhanced' (in reality,
degraded) SIPs engage in a form of market timing by modulating the investment
based on market conditions.
These tricks are offered by many asset management
companies (AMC) and even some distributors. One common trick is to increase or
/ decrease the SIP based on index levels or valuation of the markets.
Another tactic is to have an SIP, which flows into a debt
fund when the market conditions are supposedly more suitable for such funds. At
a later such funds.
At a later date, based on a predetermined set of rules,
the money flow is shifted from the debt fund to an equity fund. There are other
plans that vary the date of the investment based on similar rules.
 |
| Mr. Dhirendra Kumar, Valueresearchonline.com |
Each of these is offered by an AMC or distributor to
enhance returns. They are sold by showing the investor some sort of a back
calculation to prove that it's a superior way of investing. However, they miss
the point entirely.
The real value of SIPs lies in the simplicity they bring
to the table, and the handoff approach that they teach the investor. The
message behind these supposedly enhanced SIPs is exactly the opposite.
They promote the idea that investing in mutual funds is a
complex activity that requires constant attention and adjustment.
The only adjustment that one should make to an SIP is to
increase the amount of the monthly investments as their income increases.
That's a natural increase, and the only one that makes
sense. An SIP is a wonderful investment technique, which is based on the principle
of keeping things simple.Avoiding complexity is an important goal, and one that
you, as an investor, should never lose sight of.
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