MUTUAL FUNDS: Use SIP as a tool to build wealth in the long-term

At a time when inflows in systematic investment plans (SIPs) have crossed the Rs 13,000-crore mark for the third month in a row in December, SIP cancellation ratio touched 66%, a 25-month high, as many investors expected quick returns even when the markets were volatile.

While steady SIP inflows shows investors are increasingly becoming aware of the benefits — SIPs inflows in 2022 were Rs 1,49,437 crore, up 31% from 2021 — many investors have cancelled their SIPs because of market volatility. For those who had expected quick returns, the year 2022 disappointed them leading to a lot of SIP stoppages or cancellations.

High cancellation

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Investors may have cancelled some of the SIPs to move to a better-performing fund. Anil Rego, founder and CEO, Right Horizons, says the increasing penetration of online platforms has widened the market and redemption and stopping of SIPs is just a click away. “Expectation of higher returns in a shorter period, especially by first-time investors, and expecting only positive returns from the mutual funds led to cancellation of SIPs,” he says.

Some investors who started investing in equity markets through SIPs thought it to be a sure-shot way of making quick returns. However, that is not possible through SIPs as these are for disciplined and long-term investors. Santosh Joseph, CEO and founder, Refolio Investments, says there are many investors who have had challenges with either their income or bigger EMIs resulting from interest rate hikes which were eating into their SIPs. “What is important is that SIPs are great tools for investing. When you have good growth, even some people will be stopping in regular intervals because they want to reassess their monthly savings situation,” he says.

What are your chances of losing money in SIP

As with any investment, there is always a risk of losing money. The chances of losing money in a SIP depend on the performance of the underlying mutual fund. If the mutual fund performs poorly, the value of the investment will decrease, and the investor may lose money. To minimise the chances of losing money in a SIP, investors should do their due diligence on mutual funds they are considering investing in.

Sonam Srivastava, founder and CEO, Wright Research, says investors should consider their risk tolerance and financial goals and choose funds that align with them. “It is important for investors to consider the long-term investment horizon when making a decision to cancel their SIP, as short-term market fluctuations may not necessarily impact long-term returns. Investors should also consider the impact of discontinuing their SIP on their investment goals and whether it aligns with their overall financial plan,” she says.

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The chance of losses goes down significantly as the tenure of investing goes up. SIPs already help average out the point of investment, and hence are unlikely to lose money for investors if they have a long-term orientation. “Not choosing the right product suitable for your risk profile and without proper fund tracking —investing in midcaps when they have peaked— and also taking a higher level of risk by concentrating on mid and small caps only can lead to losses,” says Rego.

Long-term strategy

Investors must keep in mind that SIP is a tool and is not a shortcut to making money. Once you start investing in a SIP, it is a very good habit-forming exercise of saving your money in a place where there is an opportunity to grow. “Of course we have witnessed market volatility and there will be market volatility in the future but remember SIP is a great way over a long period of time to not only save your money but also to generate wealth,” says Joseph.

Investors must plan for long-term investment and link the investments to goals. They should keep the SIP date as the first week after the salary is credited in the account and maintain enough balance in the account. They must allocate the SIP amount after proper budgeting and not review the portfolio every now and then. Rather, they should review the portfolio at specific intervals like every three months.

Individuals must avoid investing at the market peak after looking only at past returns. They must understand that markets have their cycle and one should not set one’s expectations based on market peak returns. In fact, the risk is higher when past performance is very strong and where the investors have a very short-term orientation or have unrealistic expectations.