A few months back I had written a post in one of the better known Facebook groups, suggesting that in certain market conditions SIP may not be the best mode of investment. I had fully expected some objections to my post, given that many members of that group were having long standing SIP in several funds. Even then, the vehemence of the reactions were surprising to me. The gist of it was this – SIP was the only way to invest, I was out of my mind to even question it, people who were there in the group for a long time had certified it as the way to go etc. One particular response was hilarious – the person stated that SIP was not volatile while stock investments were, obviously not understanding that equity MF also invested in stocks and hence the associated risks were not really fundamentally any different.
Last week, the same person wrote to me in a private message and asked if he should stop his SIP. I think in some way the wheel has now turned a full circle. We speak about the misleading sales of insurance policies, but really encouraging people to do SIP in equity MF has been no less misleading and in certain cases definitely worse. This is because unlike insurance sales, where the agent does it and the prospective customer is somewhat wary, SIP in equity MF was being promoted by Banks, MF distributors, a variety of websites catering to personal finance, bloggers of all ilk and a host of TV programs. It was almost impossible for the investor not to get caught up in this euphoria. The premise was simple – you keep investing a certain sum every month and over a period of 15 years or more you will end up with a financial bonanza. A few people put the returns at 18 – 20 %, some spoke about 15 % but everyone was clear about one thing – even if you were terribly unlucky, you would definitely get double digit CAGR with your SIP investments. Over 20 years that would be great !!
Obviously people making such predictions had no appreciation about the characteristics of equity as an asset class. It is said that over the long term equities have the best chance of giving good returns. While this is generally true, what people forget to realize is that the “long term” is undefined. It is quite possible for equity to give great returns in 2 years as well as not give any return over a much longer period. People who had started SIP in 2011 – 2013 period would have been elated when the market rose sharply in 2014. One of the people commenting on my SIP post asked me this – if the return can be 29 % in only 3 years then think of how much it can be in 15? Honestly, I do not know but his return today has gone to single digits and I hope he is not thinking that he should have opened a PPF account.
The way people were brainwashed into believing that SIP was almost like a Recurring Deposit, only with much higher returns was amazing. We are famous for the herd mentality and in this case push from the advisers and pull from the existing customers of SIP proved too much of a temptation for most people. The hype was so much that now, with only 12 % fall in the market from the peak levels, people are already wanting to stop SIP or reducing the amounts. This is sad as if anything really works for SIP, it is continued buying when markets are doing badly.
So what is the real story behind SIP, never mind what everyone purporting to be an expert has told you?
- Regular investment in equity MF is good, even if there are short term losses in portfolio.
- If volatility is something you cannot deal with, reconsider investment in equity as an asset class.
- Standard SIP makes little or no sense, except for the convenience factor which is really overrated.
- “Long term” equity story is true but understand that “long term” is really undefined.
- Anyone telling you that MF will be less volatile than stocks is either ignorant or trying to sell you MF for reasons of his own. There are also people who really think of SIP as something unique, which again makes no sense.
Three months of volatility has shaken the foundation of the edifice that has been built over the last 6-7 years. In case the volatility lasts another year or so, people will desperately seek other means of investment. That will be unfortunate as regular equity investment is really the way to go. SIP has been misleadingly sold to many people and it is time to make an honest assessment of it, not by hammering numbers on meaningless calculators, but by having an appreciation of how equity performs as an asset class.
In my next post I will outline how you can invest in MF regularly and what are the right expectations on time frame and returns. Equity is the way to go but we need to do it the right way and with understanding, not by the blind following of people having vested interest in selling their own products.