What is comfortable is rarely profitable!
We all agree that the purpose of investing in equities through mutual fund schemes is to generate wealth in the long term. One of the most popular ways to invest is through Systematic Investment Plans or SIPs. We can tell that SIPs are one of the greatest product innovations in the financial space. SIPs help to average out your purchase price of the units, take advantage of the volatility while increasing the equity exposure in one’s portfolio.
What’s the MF industry scenario with regards to SIPs?
SIPs have gained enormous traction over the last 3 years or so. The Indian investors have been steadily increasing the monthly SIP volumes and values over the last few years. As per the latest report, the monthly SIPs amount to Rs13,573 crores at the MF industry level. Compare that to less than Rs8,000 crores per month pre-covid in 2019. SIPs gained traction between 2020 and 2021 with the increase of more than 60% in 2 years.
Why we are talking about SIPs when the awareness levels and the monthly volumes have increased and everything looks positive?
There is a reason. It is the recent increase in the number of SIP stoppages across the industry. As per the latest AMFI report, the number of SIP closures (either pre-mature stoppage or the tenure running out) has increased by 40% in the month of December as compared to the last 6 months average.
What is causing this behavior?
The probable reasons attributed are like reduced household savings due to post-covid resumption of normal activities (like shopping, travelling etc.), increased EMIs due to interest rate hikes on housing loans. This may be true for some of the investors. But the real reason seems to be that of falling one year investment returns for the investors.
The investors got very good returns between 2020 and 2022 in their Equity MF portfolio, and this prompted them to start investing aggressively. Investors started thinking yearly returns in double-digits is always possible and with SIPs, they assumed it is even guaranteed!!
Looking back at the markets over the last 12-14 months, it has been range-bound. We haven’t managed to cross the peak we saw in October 2021 till now. The result is that the MF SIP returns started tapering off. For those who are used to seeing more than 15-20% on their MF folios, are now seeing single digit returns. Far worse, for those who started investing only in 2021 and beyond. They are seeing negative returns on their portfolio. This naturally disillusions the investor and they don’t feel comfortable to continue investing.
It is where we should think counter-intuitively. It is very simple that in the long term, you make money only when you buy low. You are getting an opportunity to buy the Mutual Fund units at the same or even lower price than it was 1 year. We need to take advantage of the current low return due to range bound market environment to buy more units.
Your goal is not to make money every year on a consistent basis but generate wealth over the long term through equities. For that you have to continue with your SIPs or if possible, increase your SIPs. Don’t stop your SIPs just because you are seeing poor one year returns!
Contrarian thinking has always helped to make money in equities. This time is going to be no different.
“In Investing, what is comfortable is rarely profitable” – Rob Arnott
