What mutual fund SIPs are really about

At about ₹5.65 lakh crore, the mutual fund systematic investment plans (SIP) accounts for 15% of the total mutual fund assets under management (AUM).

That’s higher from the 13% share in April 2021. SIP AUM has grown at almost double the rate that the entire mutual fund AUM has between April and December 2021, with monthly SIP amounts breaking past ₹10,000 crore last September.

All this is welcome! SIPs are great ways to invest and build wealth. But along the way, the SIP, its purpose and benefits have become somewhat contorted. So, here’s putting SIPs in perspective — what they are and how they really help you.

Committed investments

In a SIP, you are putting money into a fund at regular intervals through the year. You knew that already. But what you’re also probably discounting is the true benefit of this.

A SIP’s biggest advantage is that it makes sure you invest every month.

It makes sure that you don’t overspend and skimp on saving. It doesn’t give you the excuse to put off investing for the next month. For the salaried especially, with income coming in every month, SIPs are the best way to ensure that investments happen.

More, by investing smaller sums every month, SIPs allow you to slowly and surely build up wealth.

Large financial goals are hard to reach with lumpsum investments for most of us! As your income grows, raising your SIP amounts – and AMCs and investment platforms provide several handy ways in which you can increase SIP amounts – will improve your wealth-building and see to it that savings keep in step with rising income.

Not a cure

But the emphasis on SIPs over the past few years have pushed down this fundamental benefit and elevated others, giving SIPs an identity that’s often misunderstood.

Take the ‘rupee cost averaging’ benefit. In reality, averaging costs down doesn’t play out easily. To genuinely average costs lower, two factors are needed. First, markets should correct. Second, you need that market fall to continue for long (or be steep) enough so that you’re able to make enough additional SIPs at those low levels such that your overall investment costs shift lower.

When you run SIPs through a market upswing, your costs are in fact moving up as you’re investing at steadily higher levels. Longer the rally, the more your cost trends upwards and the more you need a correction to lower costs.

The longer you run your SIP, the more you need a long market downturn to average, since your investment amount itself is likely to be large.

Next, consider the benefit that SIPs are the solution to investing at the wrong time. Yes, SIPs help reduce the risk of investing at highs when stocks are peaking, as SIPs allow investing at different NAVs and market levels. But, this often gets twisted into the belief that SIPs prevent losses or that they ensure high returns. That doesn’t happen.

SIPs are a mode of investment. You don’t invest in an SIP. You invest in a fund through an SIP. Your investment is the fund. Your return will be that of the fund. If a fund is unable to deliver well, having invested through SIP is not going to improve that return. If markets are correcting, so does your fund and your investment.

To extend this point further, you also don’t have ‘SIP funds’ or ‘lumpsum funds’ for the same reason. SIPs and lumpsums are only methods of investing in a fund and are not the investment itself. You only have good funds that are worth investing in, whether it is through SIP or lumpsum.

With equity markets on a tearing run for close to two years now, and with no prolonged corrective period even before that, it’s important not to lose sight of what SIPs are and are not. Having lofty or faulty expectations from your SIP is likely to disappoint you, make you lose faith in your investments should markets take a breather this year.

This can push you into stopping SIPs, the one thing you shouldn’t do. You need to run your SIPs through a market correction to truly get their ‘averaging’ effects.

Not always needed

The mistiming risk and averaging benefit is also uniformly applied to all funds, making SIPs out to be the only way or the right way of investing. No. Again, look at what SIPs do.

SIPs reduce risk of investing highs. But this high risk of mistimed investments is primarily only in equity funds (and aggressive hybrid funds). Only stock markets can drop sharply or stay down for a long time. Mistiming risk is minimal or very short-lived in all debt funds (other than gilt funds) and in hybrid categories other than aggressive hybrid.

Similarly, it is only in equity funds/hybrid aggressive funds that you can turn market volatility to your advantage, by investing on dips and lowering costs. In the absence of that volatility, you get no averaging benefit; in such funds, as long as your timeframe is right, it doesn’t matter whether you invest through SIP or lumpsum.

Therefore, remember the fundamental advantage and need for an SIP, which is that it makes you invest, automates that investment, and keeps you building wealth over the years. Don’t focus excessively on other aspects that may not apply and may only confuse you or leave you disappointed.

(The author is co-founder Primeinvestor.in)