I had written a post earlier on how SIP had evolved in India and how it gained in strength post the 2008 crash in the markets. In the last week, when I wrote a few more posts on it questioning the effectiveness of this as a mechanism of investment, I could see from the vehement reactions of many people that it is indeed very firmly entrenched in the psyche of different kinds of people. In that sense it really has been a wonderful marketing success, even though not all investors may have benefited from it in the manner they would have expected to.
Do not get me wrong here. I do believe that for someone who is not investing in equity at all, SIP in MF can be a great starting point. It helps you in instilling a habit of regular and disciplined investment and is a good way of seeing that you are getting progressively closer to your goals. Unfortunately, that is really as much there is to the standard SIP. The problem, as I have explained in my earlier post, is that the current way of SIP investing is clearly unsuited for buying equity. So, while you may well make money in your SIP, the real issue is that you could so easily have done a lot better. People will try to convince you otherwise with a plethora of data and calculations but, think through it yourself and look at the MF NAV over the last 2-3 months, you will easily understand what I am saying.
Now who are the people who have been endorsing SIP from the rooftops and why have they been doing so? Well, different categories of people have different motivations, so let us take a look at each one of them.
To start with there are the Fund houses and the MF distributors. The motivation of these people is not difficult to understand. The toughest aspect of any business today is acquiring customers – if you get a customer to sign up for a 5 year SIP you are doing rather well for yourself. For the MF distributors, it is a source of recurring commission to them as long as the customer keeps the SIP active.
Why are the financial advisers and several bloggers excitedly promoting SIP? Well, for one it is a rather simple concept, easy to explain and understand. Also, for people who have never invested in stocks, starting with MF and something like SIP is simpler. Many of these people also get caught into thinking that they are actually into a very good thing. The zeal with which SIP is defended actually tells you that many people genuinely feel it is a great concept.
Finally, why are the customers so deeply entrenched. Well firstly, there is the endowment effect. You are new to equity when you start SIP and returns of 12 – 15 % over the last 3-4 years when all that you have been used to are 8-9 % debt returns seem really wonderful. You want to support it as you feel it is a great deal, you want your friends and relatives to get a benefit from this wonderful thing too. You keep reading everywhere how great a concept SIP is and so on. When the markets are going up, your adviser tells you that your portfolio is having a bonanza, even if you are paying a higher amount for your units. When the markets go down, he says that you are now having the great advantage of buying your units at a bargain price and surely all Indians love a good bargain?
Like in the larger world the rich only get richer and the largest borrowers from banks get even larger loans, so in the world of investment something successful gets even more investors flocking to it. This has happened for PPF, ULIP, several LIC policies, Tax free bonds and also to the MF investments through SIP. So much so that many end investors who invest through their brokers do not really even know what exactly they are investing in – many have actually told me that they invest in SIP and that it is hugely superior to stocks as their broker has told them so.
Again, despite the efforts of SEBI against wrong selling, without making the customer aware of what he is getting into is rampant in our country. Many customers are told that SIP is quite similar to the debt products over the long term of 10-15 years, only the rate of return you get is much higher than the debt products people normally invest in. I mean, isn’t this downright wrong selling, never mind the fact that the investor should really not be so gullible.
My conclusion is that SIP is a good mechanism if one uses it in an intelligent manner and not be constrained by the common method of investing the same amount on the same day every month. However, a lot of people are being drawn into it without the full picture and that is never a good thing, even if some investors may yet hopefully do well out of it. As for the smarter investors the standard SIP is a clear no-no. You can do a whole lot better with your money – I will explain how in the next post.