Systematic Investment plan or SIP is probably the most used term in our investment universe today both by financial planners and individuals who want to do their own investments. It has definitely been a great marketing success where almost every investor who wants to start investing, hears about it and, more often than not, engages in it. In this post I wanted to take a look at the genesis and evolution of SIP for the Indian investors..
So in simple terms what is a SIP? It is regular investment in an investment product, preferably for the same amount over a long period of time with the hope of adequate growth to meet a financial goal. Normally when we talk of SIP we assume that the investment product is an Equity Mutual Fund but this need not be the case. You can do a SIP in Debt Mutual funds or any other product too. For example RD or PPF investments are also really a type of SIP. However, for the purposes of this discussion let us stick to Equity Mutual funds.
The origin of SIP is linked to the Dollar cost averaging concept from the US markets or the Rupee cost averaging from our markets. The idea is this – if you are owning a share and the price of it falls, you buy more of it, so that in effect your unit price of acquisition keeps decreasing over a period of time. When the market hopefully turns for the better your share will likely move up and all your units will get benefited by it. The main benefit of this approach is lowering of the cost, the associated risk is that you are assuming that the price will be going up at some point of time. This is also the reason why such an approach is really suited for the long term. people in the share market have used this in US and in India for a long time and it has worked with a varying degree of success for many of them.
When you are doing a SIP in an equity mutual fund, it is important to understand the changes from the Rupee cost averaging approach. Here you will normally fix an amount to be invested in a particular MF scheme irrespective of the price on the purchase date. The idea will be to get more units of the scheme when the prices drop. Of course, when the prices rise it will have exactly the opposite impact, but very few financial planners will tell you that explicitly. Also in an SIP you are fixing your investment in a periodic manner, which is normally a particular day of the month. This has a benefit of creating an investment discipline, removes the emotion from investing to a large extent and is administratively simple to set up and manage.
Now, Mutual funds have been in existence in India for over 20 years now but SIP has really become popular in the last 8 years or so. One of the contributing factors has been the focus on financial planning and goal based investing. With the advent of financial planning as a profession and also the availability of several online resources in personal finance, there was suddenly an explosion of knowledge regarding the need to invest for achieving your goals. Topics such as inflation, future costs and compounding became commonplace and people started realizing that for goals such as children’s education, marriage or their own retirement it was not enough to save or invest in the erstwhile manner. One needed the money to grow and equity as an asset class was an obvious choice in this respect. As few people had the knowledge, ability, inclination or risk taking attitude for direct stocks, Mutual funds became the logical or really the default choice.
In the initial period financial planners or agents wanted to get investors to put in one time money to buy MF schemes. I remember my first purchase in Franklin Blue Chip fund through an agent where I had put 20000 Rs in 2001. However, as equity investing was not very common for most investors at that time, the planners and agents soon found that it was tough going to get people part with significant sums of money one time.Indians were by and large used to regular savings through insurance premiums, PF and PPF contributions etc., so it was a much better idea to try and get lesser amounts over a long period of time. This also suited the fund managers as they did not have to deploy large amounts of cash at one go and could plan their stock strategies in a more measured manner. Note that, the term sIP was still not in vogue, that will come later on in the evolution.
The run up in the markets between 2005 and 2007 provided the right kind of backdrop for roping in more and more investors to equity investments. SIP as a term became popular in this period. You could see on a month by month basis how your investments were growing and it gave you the comfort that the financial goals may be substantial but they were achievable. As the markets were going up you were of course, getting fewer units every month but the gains from your previously bought units masked this reality. Those were heady days and everyone wanted to be in equity, SIP was king.
The party abruptly ended in 2008 and the fickle nature of the Indian investor played out to almost the full extent. Most MF suffered large scale redemption resulting in serious erosion in value as the Fund managers were forced to sell their assets at the wrong time. From a marketing perspective this was the time when SIP was re-launched. It was now being sold as a product with lower risk, where even in a declining market you gain as you get more units for the same level of investment. The long term nature of equity as an asset class was also stressed. By now financial planning and goal based investing were better known and it was easier to convince people that they could put a reasonable sum of money every month to achieve a significant financial goal that was a long time away.
SIP has undoubtedly become a phenomenon in the last few years where almost every investor is doing it in some form or the other. Retail participation in our markets for direct stocks is still very low and I think it is good that investors are able to participate in the market through this mechanism. I believe that in the kind of business environment we are having, the markets will go up in the long run and this will benefit all long term SIP investors. With the growth of SIP, variants such as Value Investment Plans, Target investment Plans etc have come up and more adventurous investors have looked at this as well as direct stocks. However, the plain vanilla SIP rules the roost and is growing handsomely as we speak.
While it has been a great success story, some aspects of SIP marketing have left a lot to be desired. The first is when most planners try to convince investors that it has a lower level of risk compared to stocks and also one time investment in MF. The second is when investors are discouraged from an objective review of their SIP by being told that you need to stay put for the long term. The third is the lack of advice on withdrawal strategies from an SIP which has led to many investors losing out seriously. The fourth is the touting of SIP as a panacea which prevents investors from looking at other options.
I will explain more on the drawbacks of SIP in the present form in my next post.
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