SIP boom

Vijay C Roy

MONTHLY inflows have grown to Rs 21,260 crore from Rs 9,181 crore in 2021, making Systematic Investment Plan (SIP) the most favoured option for investing in mutual funds. Over the past three years, SIP inflows have demonstrated a consistent year-on-year growth, achieving a compound annual growth rate (CAGR) of 17 per cent. It underscores the growing investor confidence and the robust performance of such investment plans. The number of live accounts is now close to 9 crore.

Right time to enter

“Entering the market through SIPs is a prudent approach, especially when the market is at an all-time high. SIPs allow investors to spread their investments over time, reducing the risk of market volatility by averaging the purchase cost. This method helps mitigate the impact of short-term market fluctuations and aligns well with long-term financial goals. Therefore, even at market peaks, SIPs can be a wise choice for new investors,” says Pankaj Shrestha, head-investment services, Prabhudas Lilladher Pvt Ltd.

Benefits

• Promotes consistent savings
• Eliminates the need for market timing
• Helps rupee cost averaging
• Accessible with low initial investment
• Harnesses the power of compounding

Drawbacks

• During a bullish market rally, lumpsum investments often outperform SIPs.
• SIPs invest regularly regardless of market conditions, which can lead to buying at higher prices during bullish markets.
• Once set up, SIPs usually run automatically without the ability to time the market or adjust investments based on immediate needs.

A SIP is meant to inculcate discipline in investing, not market timing, experts point out. “Only with the benefit of hindsight can one conclude whether markets were high or low. If you invest regularly, you tend to average out and increase your return potential. So, there is no good or bad time to start a SIP, particularly in the long term,” says Deepak Jain, president and head-sales at Edelweiss Mutual Fund.

According to Mayukh Datta, chief business officer, ITI Mutual Fund, SIPs try to solve three primary problems. Firstly, the cash flow issue. Most investors are comfortable to invest a monthly amount. Secondly, SIPs reduce the amount of investment issue. One can start with as low as Rs 500 per month and lastly, SIPs help to invest across all times.

Strategy for new investors

It’s important to not look at past returns, especially in the short term. The new investor should first divide goals into short-term and long-term. If the goal is to withdraw the investment in less than two years, it should be treated as short-term.

“For the short-term, invest with high exposure in debt and little exposure in equity for stable returns. For long-term, invest in 80:20 ratio in equity and debt to target 13 per cent returns. For equity, diversify across the categories, invest in AMCs (Asset Management Company) and market caps with a portion of 55:20:25 in large, mid and small caps,” says Shweta Rajani, head-mutual funds, Anand Rathi Wealth Limited.

According to Datta, an investor should keep his goal in mind and put money in a suitable fund and asset profile. Instead of looking at returns, investors could consider accumulating units over the long term.

“Prioritise savings by committing 30 per cent of your monthly income to SIPs, and increase your contributions by 10 per cent annually. Diversify by selecting three-four well-performing equity funds across different market capitalisations, and regularly review your portfolio,” says Shrestha.

The most important benefit of SIPs is that investors can start with a small amount, and gradually increase it along with their income levels. Secondly, by investing regularly, the investor benefits from cost averaging. When the market is down, one gets more units, and when it’s up, one gets fewer units. This will drag down the average investment cost. Thirdly, SIP leverages the power of compounding and reinvesting returns to boost the portfolio’s value over time.

“Investors should maintain an emergency fund account equivalent to one year’s expenses so as not to disturb their long-term savings, and diversify the investments across the categories,” says Rajani.

Staying invested and accumulating units is a prudent SIP investment strategy for long-term investors.

Mutual fund companies

As of June, 44 AMCs are operating, with many more waiting in the wings. The top 10 AMCs hold 80 per cent of the industry assets under management (AUM). Most of the open-ended schemes offer to invest through SIPs unless there are any sanctions by the regulators. The minimum SIP amount starts from Rs 100, but most of the active diversified equity funds accept minimum SIPs in the range of Rs 500 to Rs 1,000.

SIP is a way of investing. The risk that an investor carries will depend on the scheme one chooses. Also, the actual benefits start getting meaningful visibility in the portfolio only after four-five years. So, come with a long-term mindset. It’s not a short-cut to make money.