SIP- the best way to wealth creation

Market Update

This July the Indian markets continued their upward momentum registering a new all-time high, with foreign inflows, over Rs. 33,000 crores inflows in the month of July. Domestic investors continued to invest with the monthly SIP contribution at Rs. 14,000 crores. With OPEC production cuts crude oil climbed over 15% this month, Indian markets may face some impact, but most believe it will be insulated due to the discount purchases from Russia.

As many of you are aware SIP refers to Systematic investment plan which still is one of the best ways to invests in the equity markets with a long-term goal (more than 7 years).  SIPs instill a disciplined approach to investing as the bank gets debited on a fixed day and the money is invested in the fund.

The number of new SIPs has been consistently increasing however the number of SIP stoppages has also been increasing. The average period an Indian invests in an SIP is approx. 3 years which is low as when one starts an SIP it should be with a view of investing over a 10/15-year period at least to see the real magic of compounding.

This month we will focus on goal setting and aligning SIPs towards planned financial goals.

To start/increase/restart your SIP journey do connect with us for the best SIPs @ jrswealth.org/ +919881142430. We have a strong track record of creating wealth for our clients through SIPs.

Goal Setting and aligning SIPs towards planned financial goals

Systematic investment plans (SIPs), today, are one of the most popular ways to invest in mutual funds. It is often used for making recurring investments in mutual fund schemes for a predetermined amount. By making disciplined SIP investments over the long-term, and taking advantage of rupee-cost averaging, an investor can accumulate significant wealth and achieve his financial objectives. However, it is also observed that people often have faith in their SIP investments. We also see a good number of investors stopping their SIPs well before time, due to multiple reasons.

According to data from the Association of Mutual Funds in India (AMFI), for April -June months of this year, the SIP number or SIP accounts closed or stopped stood at 42.66 lakh as against 72.04 lakh of new SIP accounts opened. To put it as a ratio, out of 100 SIP accounts, on an average more than 2 accounts are being closed every month and this has increased in recent times. The data also indicates a sizable number of people discontinuing their SIPs in a relatively shorter period of time too.

Let us now try to understand as to what can be the reasons in general for SIP stoppages and the argument in response for rejecting these reasons as well.

Reason 1: Unfavorable market conditions:

We all have a fear of the market going negative. But, the real test comes when the market actually falls. Investors hit the panic button when their portfolio starts to turn red or remains red for a longer period of time. Further, if the market keeps on falling or pops out as a headline to fall more in the near future, this fear of losing more, influences some investors to stop their SIPs. The reason given is that markets are not good currently and investments /SIP can be postponed till the time the markets start looking good.

Response - Make volatility is your companion, not your enemy. "Rupee Cost Averaging" is the method to use in response to that. This is a benefit of SIP, with a long investment horizon, works in the favour of investors, especially during market volatility and downturns. Thus, the unfavorable market conditions could be the ideal period of making fresh investments and SIPs can make this happen automatically, with discipline and without your active involvement in market timing. By discontinuing your SIPs, thinking that the market conditions are not good, the investor is in fact losing out on many things. Thus, a proper understanding of how SIP and rupee-cost-averaging works, can give clarity and conviction to investors.

Reason 2: Selected scheme performance is not good:

Generally, some investors who have only seen markets moving upwards tend to think that you should get good returns after starting SIPs in a short span of time. They are impatient and do not give adequate time to schemes to perform. Often, the basis on which investors select the scheme is the past performance of the scheme. People get influenced by ratings available publicly and make investments chasing the highest rated schemes. Whereas, when the scheme starts to perform unfavorably in the short-term, they usually stop their SIPs, saying that the scheme is not performing well and then again look out for the top performing and ranker scheme.

Response - Unfortunately, with this approach of chasing top performing or ranking schemes, investors lose their valuable time and money in this investment approach. We should keep in mind that past performance of the schemes may or may not repeat in future. We have very often seen that the top performing schemes are likely underperform after some time.

As investors, we should have patience and understand that some schemes may take time to perform. We should be satisfied if our scheme is a consistent performer over the long-term and this is possible with proper investment process, fund house credibility, the team managing the scheme and so on. We also have to accept that short-term performance is not indicative of long-term performance. If the scheme is good on the parameters said, instead of discontinuing our SIPs due to poor scheme performance in the short term, we can think about giving it more time.

Reason 3: Unavailability of funds:

Mutual fund investments have liquidity and most investors tend to dip into their savings whenever a need arises. Further, whenever there is a squeeze on the monthly budget and finances or a crisis, the SIP investment is the first to take the hit since it is not deemed to be as crucial as the rest of the things, even including discretionary spendings. Shortage or inadequate funds is one of the common reasons for people stopping their SIPs. It is easy and there seems to be no immediate or visible downside for doing so.

Response - Often people do not keep savings on the same pedestal as the rest of the things. Even when you can easily accommodate all expenses, SIPs are stopped at the first pretext of funds being not available. Rarely do we find that people try to cut down on avoidable expenses to make space for SIP savings. As we all know, mutual fund investments are often treated as the first source of funds, whenever we want to make purchases or spend money. All this comes at the cost of compromising our long-term financial objectives. However, in genuine emergency crises or cases, dipping savings can be an exception but not a rule to follow in each of such cases. Therefore, stopping and/or delaying your SIPs only means that at a certain date in future, you will have lost much more than what you are using today due to the power of compounding over the long-term. The alternative to this is to build and maintain an emergency fund or seek loan against your mutual fund investments, if required, while continuing with your ongoing SIPs.

Bottom Line

Where people typically put a lot of effort into starting a SIP, they might give up on the same very easily. Investors only recognize the value of SIP perseverance when their future financial goals are aligned with SIPs. As the goals are long term so should be the SIP. We would urge investors to think about the reasons and the responses to explore possibilities before taking any of such decisions. Feel free to talk and consult us for better guidance before stopping your SIPs.