By Jimmy Patel
The Systematic Investment Plan (SIP) data released by Association of Mutual Funds in India (AMFI) reveals the extent of the opportunity available for financial advisors to build a robust SIP book.
The year 2019, despite being eventful and turbulent for the Indian capital markets, SIP contributions (inflows) were consistent-around Rs 8,000 crore every month. Cumulatively for the period January to November 2019, SIP contributions have been to the tune of Rs 90,094 crore.
The SIP AUM has touched an all-time high of Rs 3.12 lakh crore. Currently, the industry has about 2.94 crore SIP accounts (or folios) through which investors regularly deploy their savings in various mutual fund schemes, mainly the equity-oriented ones. Thanks to the Mutual Funds Sahi Campaign launched by AMFI in 2017, SIP has become a household name today.
However, the data also reveals that a number of investors tend to discontinue SIPs. Also, the holding period of majority investors is not more than two years. Only 35% of the equity assets have been held for a period greater than 24 months.
So, financial advisors have an important role as a guardian to play. Even in the present times, where several robo-investing platforms are sprouting, millennials (between 25 and 35 years) prefer being advised by intermediaries (such as banks and distributors) and invest in paper form. The AMFI data reveals that retail and High Net-worth Individuals (HNIs) prefer the services of mutual fund distributors.
It is a common belief among many investors that moving in and out of from under-performing schemes to relatively better performing schemes and basing their investment decision on the market movement will maximise returns. But this invites a switching cost, which weighs on the effective returns.
Even if the tide turns turbulent and is likely to impact the scheme's performance in the short-term, investors must remember that volatility is the very nature of the market. Ideally, one must not panic and jump off the SIP ship.
The importance of staying put with SIP investments even during turbulent times need to be explicated well to investors/clients –particularly when the mutual fund scheme/s are among the best-performing ones.
In fact, in times of heightened volatility, the rupee-cost feature of SIPs would work best supporting the function of power of compounding. Similarly, longer flat market phases, at times, are good to SIP into mutual funds. When the markets move up, the SIP instalments will buy fewer mutual fund units, but the pace of wealth creation will accelerate provided the mutual fund schemes recommended are among the best ones.
Do not stop SIPs
By stopping SIPs influenced by the market movements or looking at only the short-term under-performance of otherwise worthy scheme/s, the investor/client could only end up jeopardizing the envisioned long-term financial goals viz. buying a bigger house, children's future needs (education and wedding expenses), and retirement, and so on.
Always evaluate the scheme, pay attention to its long-term track record and to a host of quantitative and qualitative parameters. In times when interest rates on bank fixed deposits and small saving schemes are going down, mutual funds, particularly the equity-oriented schemes, are a promising investment avenue for long-term wealth creation.
If the investor has a high-risk appetite, a time horizon-to-goal of at least five years, broadly the investment objective is capital appreciation, and wants to clock an appealing real rate of return (also known as inflation-adjusted return); then SIPs in diversified equity mutual funds will be an appropriate choice. That being said, ensuring that the SIP tenure is almost in line with the investment time horizon before a respective goal befalls is equally important.
When investor have a very far long time horizon of more than 15-20 years, they should step-up SIPs. This will help investors counter inflation better, add to the power of compounding, and enable them to achieve their financial goals comfortably.
The writer is MD & CEO, Quantum AMC