The systematic investment plans (SIPs) account for nearly 15 percent of the total mutual fund assets under management (AUMs). The SIPs are a great way to invest in mutual funds but not everyone understand its nuances. We try to decode some of them here.
It is believed, and rightly so, that SIPs offer a convenient and cheaper way to invest on a regular basis, especially for the salaried class.
However, SIPs have lately acquired an identity which is misconstrued as something bigger than a way of investment. To be able to break any myth, one should first understand how they work. The success of SIPs stem from the rupee cost averaging.
The averaging brings costs down when the markets tend to correct and this market fall should continue long enough so that one can make further SIPs at the low levels, resulting into lower cost overall.
In other words, it works like this: you buy fund units at different price points across its tenure by investing (say) ₹3,000 every month. Now since the markets are volatile, your overall cost will likely be an average of different prices at which you bought fund units.
But when the markets are rising for a considerably long period, you are essentially buying fund units at a higher level. And longer the rally continues, your cost would rise continuously. This will require a steeper correction in future to lower the overall cost through averaging.
Mode of investment
One key point which several lay investors tend to miss is that SIPs are a mere mechanism to invest. They are not separate funds. So, if you invest in a fund that doesn’t perform well, merely by investing via SIP wouldn’t help. When the market declines, so does your fund which means your investment in on a downhill – be it SIP or lumpsum.
Deepak Aggarwal, a chartered accountant and a financial advisor, says, “As a matter of fact, SIPs are an alternative to investing at the wrong time since you stagger your investment across different price levels. But some lay investors tend to believe that it is a sure-fire way to prevent losses or to ensure high returns. The SIPs don’t ensure that.”
So, does it mean that one should stop their SIPs when the markets are rising relentlessly? Well, barely any financial advisor would advise you that since mutual fund investments are often made to meet a long-term goal in sight, and any discontinuation can disrupt those goals.
Deepesh Raghaw, a SEBI-registered investment adviser, says investing in the market is not a sprint, but a marathon. “It’s not advisable to take decisions based on short term moves. Let’s say that Sensex would touch one lakh points in the long run, then it wouldn’t matter whether you purchased the funds at 50,000 or 60,000,” he says.
Raghaw further advises against taking a binary call of stopping or continuing with SIPs. “So long as your monthly investment is within your allocation target, you shouldn’t stop it,” he adds.
While shedding light on the feasibility of stopping the SIP during the rising market, he said it is still easier to invest in the rising market but not in a declining market.
So, whether you continue with SIPs or put them on hold for some time in the wake of surging market hinges on your investment goals and availability of funds, but it is imperative that you keep your expectations within the realm of realism and be mindful of what SIPs can, and importantly — cannot do!