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Mutual fund SIPs don’t make equity investing risk-free. Here’s why

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Though leading benchmark indices such as the Sensex and Nifty are still close to their all-time highs, most mutual fund investors continue to feel dejected. The despondency is greater among investors who invested via the systematic investment plans (SIPs), wrongly believing the myth that SIPs make equity investing risk-free. Even now, bank relationship managers who have actively propagated this myth, are trying every possible trick in the book to get people to invest via SIPs. This writer recently got a call from a relationship manager of a leading foreign bank who offered Rs 700 gift voucher for starting a new SIP.

While it is true that SIPs reduce the risk of market timing and also allow investors to buy more number of units when their price has fallen, it does not make equity investing risk free. “Over the years, the knowledge about SIPs has improved in big cities. However, it is still low in smaller cities and many investors from there still think that the SIPs will make equity investing risk free,” says Gajendra Kothari, MD and CEO, Etica Wealth Advisors.

Several investors entered the market assuming that SIPs will make their equity investments risk free. They are now shocked to see their investments in the red, especially those whose SIPs have run for a reasonable period of 2-3 years. Either because of more information about SIPs, or because of the losses suffered, investor fatigue seems to be finally setting in. Industry-wide SIP collection have marginally ebbed in May 2019. Compared to Rs 8,238 crore collected in April, investment via SIPs fell to Rs 8,183 crore in May. More importantly, year-on-year growth in SIP inflows has been falling steadily and reached its lowest point in May 2019—12%.

Another reason for investors’ disappointment is because most new SIPs were in mid- and small-cap schemes, and returns from many of these schemes have fallen sharply. “Due to high returns few years back, most new SIPs were started in mid- and small-cap schemes and since most of them have generated low returns, investors are upset now,” says Kothari. Some schemes have started reporting losses even over a three-year period (see chart).

Mid- and small-cap funds that disappointed the most
Starting fresh SIPs based on the past performance of the mid- and small-cap segment has not worked for investors.

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Note: Only schemes with AUM of more than `1,000 crore were considered. Source: ACE MF. Compiled by ETIG Database.

Investors are particularly disappointed because they raised their allocation to equities (started new SIPs) based on the returns from their existing SIPs. The new SIPs, however, failed to meet their return expectations. “Once investors start losing money on existing SIPs, they don’t start new SIPs. This explain why the growth in SIP inflows is plateauing now,” says Kunal Bajaj, Head, Wealth Management, MobiKwik.

Don’t stop your SIPs
The SIP collections are still rising, though at a slower pace, because investors have not stopped their SIPs. However, they may feel inclined to do so, if their losses pile up further. However, experts advise against stopping SIPs. “Just like increasing the number of SIPs during a bull market, reducing the number of SIPs during a bearish phase is also a bad idea,” says Bajaj. The three-year SIP returns are close to zero for BSE Midcap and BSE Smallcap indices.

Volatile medium-term returns
But performance has bounced back in the past, so stick with SIPs.

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However, they have bounced back several times after going into negative in the past. So, investors who started long-term SIPs should continue them. “Some investors start SIPs with a long-term view, but stop it if the 2-3 year returns go in the negative. This is a bad strategy, and to get the full benefit of SIPs, you need to continue with them during bear markets,” says Kothari. However, investors should also keep in mind that there is no guarantee that you will generate positive return if you invest via SIPs into equities even if you do so for 10 years (see chart).

No guarantee of good returns
Even 10-year SIPs cannot remove the downside risk.

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[“source=economictimes.indiatimes.”]

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