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    Are mutual fund investors betting on SIP for wrong reasons?

    Synopsis

    Systematic Investment Plan or SIP has become a buzzword in the investment world.

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    By Ashish Modani

    "SIP is the best way to invest."
    "I want to invest in SIP, it gives great returns."
    "Mutual funds are not safe, but SIP is."

    Many mutual fund investors never tire of repeating these statements these days. Systematic Investment Plan or SIP has become a buzzword in the investment world. Somewhere it had cemented the belief in investors’ mind that "SIP aur bhi jyada sahi Hai."

    It is heartening to know that investors have started understanding the benefit of investing regularly, but I fear that many have started believing that SIP is a guaranteed road to success. Investors have started believing that SIP is the best product. Earlier, investors used to ask about the best fund for the best returns. Now, they ask for the best SIP to invest.

    In the last five years or so, many factors together spread the SIP fire. Lack of returns from other asset classes, buoyant capital markets, mutual funds sahi hai campaign, media coverage, and a huge push from AMCs and distributors, and so on, helped the cause of SIP.

    No doubt that SIP is a great tool. It works on the concept of Rupee Cost Averaging. However, to start a SIP with the belief that nothing could go wrong if you invest through SIP is foolhardy.

    Over 80% of the investors have entered the mutual fund world in the last five to six years. They haven’t seen the 2000-2003 downside or the 2008-2012 period when the market crashed around 60% from its peak. Also, there were periods of low returns, no returns, and also negative returns. Along with that there was gloomy economic scenario, low GDP, other asset class giving a better return than equity markets, etc. Many SIPs got terminated, many withdrew even at losses, many investors swore they would never enter the capital markets in the entire life.

    The point I am trying to make is- are you really in love with SIP or are you investing through SIP because of the good times or is it because you don’t have other investment options? When you are in love, you stay together, irrespective of whether the times are good or bad. In fact, you come closer during bad times. But when you are only trying to cash in on the good times, things look good only till the time the party is going on. But good times do not last forever.

    The true character of SIP investor will be tested when there are bad times. In fact, the real benefit of SIP will accrue only when you keep investing during the tough phases in the market. Imagine your account statement like this:

    SIP amount: Rs 10,000
    Investment amount: Rs 6,00,000
    Value of investment: Rs 4,57, 114
    Annualized Return: - 11.58%
    (In case you missed it, it is negative returns. In other words, you lost money)
    Okay, this is when you are supposed to renew your SIP. Would you like to commit yourself for a SIP for the next five years?

    If the answer is no, better stop your SIP right now. Leave right now and start a Recurring Deposit or wherever you feel safe. You better take care of your hard-earned money.

    If you cannot stomach negative returns, say, -17% annualized return, on your SIP after five years, I am afraid you will not be able to create loads of wealth from your investment. Remember, when you are investing, it's only compounding that creates wealth. And compounding happens only when you invest for decades, not months.


    (Ashish Modani is a certified financial planner (CFP) and founder of SLA Financial Solutions)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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