Called in full ‘Systematic Investment Plans’, SIPs are not only efficient but also convenient ways to invest in different equity markets.
- There are known cases of mutual fund investors who initiated equity fund SIPs a few years back and have received exception returns upon maturity.
- Bear in mind that sometimes the investment value will be less than the invested amount, in accordance with the past few years.
- There was also an occasion in December 2016 when investors earned much less than what an average savings bank gave out. The returnwas (and probably still is) 2.88% for an average 2-year SIP investment return.
- However, SIPs are still a reliable investment choice, the reasons for which will soon be detailed.
What to Know About SIPs – Fact vs. Misinformation
The first thing you need to know is that SIPs are modes of investment, not investment options. This means returns will vary, sometimes going up and at other times down. There is no guarantee or specific framework in which SIP returns are to be understood.
- These past few years has seen the market slumping, a fact that directly affects equity markets of which SIPs are a part.
- On the other hand, your own error (no offence intended) could have led you to invest in an under-performing fund.
- FundsIndia’s Head of Mutual Fund Research, VidyaBala, is on record as having stated that SIPs have more to do without-performing and/or under-performing funds than simply good or bad returns.
- Just as you may generally compare funds with their peers or benchmarks, it will be wise to compare SIPs with one another.
- It has never been fact that SIPs will always succeed. They may have proven capable of averaging out costs but they have displayed no guarantees for capital protection.
- Studies conducted on the performance of 3-year SIPs under different market conditions showed a rise and fall in the 2006 to 2008 time-frame. The markets started off well then fell into a slump that only alleviated in 2010.
- In case markets remain healthy, your SIP investments will flourish, like they did for those investors who began SIPs in January 2008. If stock prices suffer, so will SIPs.
SIP Investment & The Equity Market
You must be willing to take some risk if you plan to deal with SIPs. Equity markets are known for being volatile and unpredictable. It is only obvious to expect this, knowing that stock indices move haphazardly and never in a straight line.
- This ‘imbalance’ helps you in more ways than one. You can buy units when the price drops, and sell them when they rise.
- However, this is not always the case. According to IDFC Mutual Fund, there was only 1% observed inflow with a PE of less than 16 (i.e., market was cheaply priced). When the PE oscillated between 16 and 19, there was an observed 19% inflow (i.e., market was moderately priced). And when the PE exceeded 19, about 80% of the remaining inflow was observed (i.e., market was expensively priced).
- Then again, those who bought cheap actually saw an outstanding percentage of returns at the end of a 10-15-year investment period. The same applied to 3- and 5-year periods.
- If you wish to see the long term picture, you will need to focus on market cycles and their long term performances. Case in point, 2008’s upsurge following a downturn.
To pause and answer the article’s main heading, you should not concern yourself with short term benefits where SIPs are concerned. Outlook Asia Capital’s CEO, Manoj Nagpal, studied equity funds in relation to 10- and 15-year SIP returns. You can find tabulations of the same on the Outlook Asia Capital site.
Wealth-building potential and attractive ROI is possible over the long term with SIPs. You should therefore not trouble yourself with short term ‘disturbances’ in market progress. However, those looking to invest in the 3- or 5-year short term investment gap are better off buying SIPs when the market is cheap or moderately priced.
Much can be learned through patiently reading up or researching SIPs online. You need to take the time, however boring that may seem sometimes, to study tables, charts, and progress reports for SIPs over a period of time; preferably a long term period consisting of 10-15 years. You will therefore essentially be performing a comparison study. Sooner or later, you will need to compare SIPs among their own peers and benchmarks.
Bear in mind that there is no ‘winning formula’. The market is guaranteed to waver, and you are assured of a loss at some point in the investing game, especially where SIPs are concerned. You must understand that short term SIP investments will prosper only if the market is running at a steady healthy rate. Otherwise, you are better off taking your chances with long term investments using SIPs.