scorecardresearchMutual fund investing: Are SIPs better for long-term investing?

Mutual fund investing: Are SIPs better for long-term investing?

Updated: 31 Aug 2022, 09:42 AM IST

Recently a fund house restricted investment in its new fund scheme to systematic investment plan (SIPs). We try to uncover the nuances and explore whether this is a good way of go about making an investment

Wealth advisors suggest that investing through SIPs is a good strategy 

Wealth advisors suggest that investing through SIPs is a good strategy 

WhiteOak Mutual Fund recently announced that its recently-launched mid cap fund will accept investment only via systematic investment plans (SIPs) after the NFO (new fund offer) period. The scheme is accepting lump sum investment only during the NFO period that ends on Aug 30.

Although investing through SIPs is highly recommended for retail investors but this is seen as one of the better alternatives and not as the only option.

Wealth advisors and experts, however, suggest that fund houses tend to take this route in one of the two scenarios. First the current valuations are on a higher side, and the second, when the existing investment opportunities are few and far between. 

Consequently, they stagger the investment across a long time.

Why are SIPs better?

The rationale of investing via SIPs is straight forward. Instead of investing lump sum at a price that could be substantially higher than the  intrinsic value of constituent stocks, one should ideally invest a regular sum of money at different price points in a bid to raise the possibility of earning higher gains.

This was famously recommended by Benjamin Graham in his bestselling book The Intelligent Investor wherein he referred to this as the dollar cost averaging. Just as a systematic investment plan, dollar cost averaging (DCA) is the averaging out of investment cost by making investment across a time period instead of investing in one go.

DCA is the practice of regularly investing an equal amount of money at regular intervals regardless of the prevailing price. This can substantially reduce the impact of price volatility and lower the average cost per share.

“SIP provides the benefit of Rupee Cost Averaging. This ensures that you buy more units of a particular mutual fund when prices are low and less when they are high. Thus, in long term, you are benefited from a bull as well as the bear run of the stock market.  SIP keeps you worry-free about the timing of the market,” says Preeti Zende, Founder of Apna Dhan Financial Services.

Not unprecedented

Enabling the investors to invest only through SIP route is not an unheard of move by the fund houses. Several mutual funds have done this in the past, said Amol Joshi, founder of Plan Rupee Investment Services. 

“Typically, fund houses would take this call when market is overvalued. Another reason is when there are not many investment opportunities,” he said.

He further adds that this phenomenon is more common among small cap and mid cap funds.

“This is more peculiar to the mid cap and small cap companies. The fund houses may find it hard to deploy their money in one go in the companies between 101 to 250, and between 250 to 500,” Mr Joshi said.

Ravi Saraogi, co-founder of Samasthiti Advisors also says that this practice of encouraging investors to invest via SIPs is more common among small cap and mid-cap funds.

“Investing through SIPs is a behaviourally superior way of investing as it automates the investing process and removes the temptation of trying to time the markets. This is particularly true for midcap and small cap exposure as such investments show higher cyclicity compared to large-cap exposure. Thus, investing through SIPs is a good strategy,” said Saraogi.

He further adds that SIP is a way to invest, and hence, it does not reduce the risk of investment per se. So, investors should be careful when investing in small and mid-caps.

“Investors should be forewarned that investing through SIPs do not reduce the risk of investing in equities - irrespective of lumpsum or SIP investments, equity remains a volatile asset class and SIPs do not magically transform equity investments into debt-like investments. Thus, irrespective of lumpsum or SIP investing, investors need to keep a long-term focus when investing in midcaps,” said Ravi Saraogi from Samasthiti Advisors.

Small cap funds are illiquid and even small inflows and outflows can cause big change in their prices
First Published: 31 Aug 2022, 09:42 AM IST