Understanding The Importance Of SIP

Soumyajit Ghosh Founder Director Wealthapp Distributors Pvt. Ltd.

A systematic investment plan (SIP) allows an investor to invest a fixed amount regularly in a mutual fund scheme, every month. Often, SIPs are used to stagger equity investments across several years. Interestingly, in the past few years, SIPs have gained tremendous popularity due to three stand-out benefits: 1) Imparts financial discipline to the investor, 2) Averages out purchase costs, and 3) Provides the benefit of compounding. Thanks to the ‘Mutual Funds Sahi Hai’ campaign, many first-time investors have started to invest through SIPs for their long term financial goals. But, in 2020 when the markets corrected, many investors stopped their SIP. Through this article I wish to address these investors and those who haven’t

The Art of Choosing a Fund

Many investors spend a lot of time on Google trying to decide on the best fund to start a SIP. But the point they miss is that extensive reading and ratings alone will not help you spot the best performing fund. Here, contrary to popular belief, when investing in SIPs, the best funds generally do not end up giving the best return. This is because most often rating is based on how less volatile the fund is and the volatility of a fund is directly proportional to its SIP returns. But over the years, it is often seen that a not-so-good, highly volatile underperformer may end up delivering better returns than a highly acclaimed fund.

If this has confused you, then please note that the real benefit will come if the fund value remains low in the initial years of your investment. This may test your nerves, make you unhappy, but remember it is also the phase when you will be able to accumulate more units of the fund. Over the years, as the fund performance gathers pace, the value of your investment will rise exponentially. And it always does, when you invest in a diversified equity fund.

Let us consider two funds:

1. A Highly Rated Fund: Its NAV moves from ₹ 10 to ₹ 20 in five years. You have invested ₹ 10,000 every month. As an investor you are happy to see your portfolio increasing steadily over the years.

2. An Under-Rated Fund: Its NAV also starts at ₹ 10, but goes down to ₹ 2 and then recovers to ₹ 12 after five years. The drop in NAV will cause the returns to be in the red and consequently most investors would stop and redeem their SIP. In this journey, all the motivation that led to initiate this investment got thrown out of the window.

In reality, let us check how the SIP returns would have panned out in these two cases:

The table shows that the highly rated fund will grow your investment value of ₹ 6 lakhs over five years to ₹ 8.71 lakhs at 14 per cent per annum CAGR. On the other hand, the underrated fund turned ₹ 6 lakhs to ₹ 15 lakhs in the same timeframe i.e. a whopping 33 per cent CAGR. In short, do not stop your SIP just because its return profile has turned negative or the fund has seen a drop in terms of ratings. This is because investing via SIP is like planting a tree. In the initial days, one must tend, water it. After a few years, the tree grows big and starts taking care of you. The only thing that can stop this eventuality is if you cut the tree. For investors without earning, stop the SIP and start SWP (systematic withdrawal plan) from the corpus that you have built.

In today’s scenario when a bank recurring deposit or post office gives 6 per cent per annum, the worst return that one has received through SIP into a diversified mutual fund is more than 12 per cent per annum over the past couple of decades. Today investors have the option of engaging in SIP in an international fund which will not only help diversify the country risk but also help build a corpus which is dollardenominated. One must set aside a small portion of one’s income for SIP and over time it will grow into a large corpus. Start investing in SIPs today and if you have already started, keep increasing the SIP amount every year and with time you will get better at it just the way you get better at yoga by practising it every day.

The writer is Founder Director, Wealthapp Distributors Pvt. Ltd. • Email: soumyajitg72@gmail.com • Website : www.wealthappdistributors.com