Systematic investment plans (SIPs), a term typically associated with small or retail investors, has emerged as a big wave in the Indian mutual fund industry. Despite the frequent bouts of market turbulence, investors still give about Rs 8,000 crore of their money as SIP investment to the mutual fund industry every month. However, of late, there is noise about SIP cancellations and SIP pauses. Some investors are getting nervous about the market. They have a reason to be. One-year loss of some funds is as high as 20-40% even if you did your SIPs diligently. In the 3-year period, losses of 10-20% in funds where investors did SIPs is also happening. The investors who are experiencing such losses and those who have not are also worried.
Additional read: When should you start your SIPs?
Is the SIP method proving to be useless? No. A big emphatic ‘NO’. There is nothing wrong with SIP investing. There is also probably nothing wrong with your fund. Markets are not doing well, and your SIP being a market-linked is only reflecting a part of that pain. Let us remember three key SIP mantras which will help you remain calm.
1. SIP is ideal for weak markets
In a SIP, you invest a fixed amount of sum at different times. Thus when the markets are weak and stock prices are lower, you buy more units. So, if the markets are weak, it is a GOOD thing for you. When markets go up, you buy lesser units. Over a period of time, the cost per unit averages out and usually places the investment in a position to earn good returns. This concept is known as ‘Rupee cost averaging’, the fundamental driver behind SIP investing.
So if markets are down 10-20%, it is a good thing for your SIP. If your SIP returns are negative it is because they are continuously buying MF units at lower prices every subsequent month. When the uptick happens, you will not complain.
2. Negative returns vanish when SIP gets old
SIPs are long-term products and are very useful in wealth creation and risk reduction over a longer investing horizon. An analysis by CRISIL shows that the risk of getting negative returns reduces over longer investing horizons. An analysis of CRISIL-AMFI Equity Fund Performance Index over the past 15 years to June 2019 showed that the instances of negative returns declined as the investment horizon increased. The difference between the minimum and maximum SIP returns also narrowed with the increase in the investment horizon. Chances of negative returns is as high as 25% in year 1. This chance falls to 17% in year 2, to 8% in year 3, 5% in year 4 and becomes zero in year 5.
Further, investing through SIP for longer tenures can significantly increase the amount of wealth creation. An analysis of various equity categories shows that returns, and the subsequent wealth creation, for investors improve in line with the increase in the investment horizon. Finance theory calls this the compounding effect, which says that longer periods of time allow your money to multiply. After 5-6 years, the difference between maximum SIP return and minimum SIP return starts reducing rapidly.
Take a look at the chart below to understand how the age of SIP is connected with the variance of returns.
3. Top up SIP when markets are down
Investors can benefit more by topping up their investments on a regular basis. A comparison between a regular SIP and a top-up SIP – assuming a monthly investment of Rs 5,000 in CRISIL-AMFI Equity Fund Performance Index for 15 years to June 2019 shows that a top-up SIP (with a 5% increase in contribution every year) yields Rs 33 lakh, compared with Rs 26 lakh for a regular SIP.
Top-up SIPs allow investors to increase their SIP contribution periodically, in sync with their rising incomes. Top up SIP is a facility whereby an investor has an option to increase the amount of the SIP Installment by a fixed amount at pre-defined intervals. This helps you as an investor to invest more to achieve goals, and can even act as an automatic route to increase savings in sync with your rising income.
Take a look at the chart below to understand how top up SIPs work best.