Over the last one month I have got several messages from readers of this blog and people I know otherwise as to how their financial plan have gone totally wrong just in the space of a few trading sessions. Most people are shell shocked and are wondering how the basic strategy of SIP which was seemingly invincible has shattered so completely. While I agree that the current sell off is something no one could possibly have anticipated, the seeds of such a risky financial planning was sown much earlier through the SIP route.
The last time the stock markets in India went for a roller coaster ride was in the years 2008 through 2010 but not too many of the current investors were investing then. The whole idea of financial planning through SIP was started in full force after the 2008 January market crash. Investment in MF through SIP was touted as a big thing for planning your finances in order to meet long term goals of individuals. In the initial days SIP was promoted by many financial planners as a reverse EMI, only something that helped you build a financial asset as opposed to a home etc. The reason it became a huge success was the secular bull run that our markets had till very recently. Yes, there were many times when short term corrections were there but these were seen as opportunities to invest more in the markets.
Once the markets kept rising after 2010, the early adaptors of SIP saw great gains on their early investments and word of mouth advertisement along with the proliferation of MF agents with aggressive sales tactics ensured that it became the default choice of all the people coming into the workforce. Over the years the myth got propagated that SIP was almost like an investment in a bank FD only with a return of 12 % or more !! The investors lost sight of the risks that are part and parcel of every market. This was almost like an accident waiting to happen and it did, only the scale of it was swift and brutal. The plan of the financial planners was quite a good one, insomuch as investment in equity as an asset class for the long term is quite inevitable in a high inflation economy that we are. The error of judgement on their part is to get overly greedy and recommend that almost all investible surplus be put into equity. Investors not only kept increasing their SIP amounts but some also went into direct equity without knowing a great deal about the market and not having enough time to do adequate research.
The situation could have had a much better outcome had asset allocation been followed properly and people had 40 % of their assets in various debt instruments. Sadly, PPF and other small savings schemes were seen as stodgy and boring and even if some investors did go for debt, their choices were types such as the Credit risk funds etc which had their own problems too. The overall impact today is that the XIRR of a 10 year SIP is lower than those of PPF returns. Yes, this will become better over a period of time but a lot of the gains over the last few years have now been frittered away.
A lot of people who are readers of the blog have wanted me to advice them as to what they should do now? I am happy to answer any specific queries that you have, feel free to send it to me here or in the Facebook group. Some of you have also wanted to know if I can provide my HELP services to them. As I have said before, I do this only for a few people but in the current situation I am happy to take on a few more people. You can read about HELP program here and understand about the work I have done so far here. The people wanting to interact with me can mail me at email@example.com
Watch out this space for my next posts which will contain more action plans as to how you can deal with your personal finance issues now.