For regular visitors on Personalfn, the title of this article may come as a bit of a surprise. After all we have assiduously (at times at the risk of sounding monotonous) propagated the cause of investing using the SIP (systematic investment plan) route.
So why the rethink? Some clarifications are in order. We aren't giving up on SIPs. We continue to believe that investors in the mutual funds segment should most of the times invest via the SIP route.
However, certain instances of misinformation in the media have prompted us to reveal the 'dark' side of SIPs.
In this article, we list the wrong reasons for investing through SIPs and cite instances when SIPs may not deliver.
1. SIP is a 'means', not an 'end'
Investors would do well to realise that the SIP is a means for achieving one's financial goals and not an end by itself. Starting off aimlessly with an SIP in isolation may not be the right step. The SIP needs to be a part of a broader financial plan (like planning for retirement or child's future for instance) and should be targeted at achieving a predetermined objective.
A directionless SIP could well turn into a financial burden at a later stage and instances of the same being cancelled are not uncommon.
2. SIP in the wrong fund
An investment in a poorly managed fund remains just that irrespective of the investment mode i.e. lump sum or SIP. Hence it is imperative that investors first select a well-managed fund which has a track record to show for. Simply making an investment through an SIP will not eliminate the inadequacies of the underlying investment i.e. the mutual fund scheme.
Similarly, investing in a sector/thematic fund using the SIP route doesn't necessarily reduce the risk associated with that investment. Hence before joining the 'SIP band wagon', address the most pertinent question - 'what's the right mutual fund scheme for me?' The investment advisor should ideally aid investors at this stage.
3. SIP performance
In their fact sheets, fund houses are known to flaunt the performance of their schemes assuming that investments had been made using the SIP route. It is not uncommon to see 5-year or even longer time periods being considered for this purpose.
While per se, there is nothing wrong with the same, this is often used as a ploy by poor-performing funds to window-dress their performances. Over longer time frames when equity markets have been through more than one cycle (a bull run followed by a bear phase or vice-versa), the benefits of rupee-cost averaging become apparent.
For example, let's consider an open-ended diversified equity fund which has been in existence for over a 6-year period. Since inception, the fund (8.4% CAGR) trails its benchmark index (12.9% CAGR). However an SIP performance over the same time frame could show the fund (28.1% CAGR) outperforming its benchmark (26.4% CAGR).
Hence the SIP performance can actually be misleading. Of course, the fund house is unlikely to reveal that its fund looks better on the SIP performance front because it fell harder than the benchmark during the lows, which in turn aided the SIP calculation to lower the cost of purchase.
4. The investment advisor effect
While most fund houses now charge entry loads on lump sum and SIP investments at the same rate, some continue to subsidise investors by charging lower entry loads for SIPs.
Investment advisors are known to use this to their advantage by pushing schemes with lower entry loads. Sure, investors do benefit if the entry loads are lower, but that doesn't qualify as a good enough reason for getting invested. Instead, investors should aim for investing in schemes that fit into their portfolios and match their risk appetites.
Another reason for investment advisors' promoting SIPs is the cash incentives offered by fund houses. Schemes like 'garner SIPs worth a predetermined amount and get a cash incentive of Rs 100 to Rs 2,000 per SIP clocked' are routinely offered to distributors.
Although, there is nothing wrong with the distributor earning a cash incentive or the investor bearing a lower entry load, getting invested in a scheme only for the same is certainly out of place.
5. SIPs are not foolproof
As a mode of investing, SIPs aren't necessarily foolproof all the time. While over longer time frames (3 years and more) and across market cycles, an investment via the SIP mode is likely to prove more lucrative vis-à-vis a lump sum investment, the same may not necessarily hold true over shorter time periods.
For example, if the markets hit a secular bull-run and moved northwards consistently, the SIP investment (over that period of time) may not have the opportunity to gain from the lows in the markets and the benefits of rupee-cost averaging won't accrue either.
6. Beware of banks
If individual distributors are peddling SIPs to win contests, can banks be far behind (remember banks are among the biggest distributors). And because banks have access to your account details, you need to be even more careful of them.
In one instance, we came across an insurance (yes insurance, not investment) consultant representing a leading private sector bank (that had access to the author's bank account details), who made a pitch for a Rs 2,000 monthly SIP.
On being told that the minimum SIP amount for that particular AMC (Asset Management Company) was Rs 1,000 and not Rs 2,000, he pleaded ignorance. On checking with that AMC, we learnt that indeed the minimum SIP amount was Rs 1,000, but the bank in question had internally raised the SIP limit to Rs 2,000 for its clients!
In conclusion, we reiterate our view that in most cases, investors would be better off investing via the SIP mode; however, the investment should be made for the right reasons and investors should also be aware of the flipside of SIP investing.
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