Systematic Investment Plans - Do not be swayed by what Mutual Fund Agents and distributors say..!

Systematic Investment Plans - SIPs - 
Do not be swayed by what Mutual Fund Agents 
and distributors say..!

Systematic Investment Plans (SIPs) work wonderfully in helping investors get great returns from equity based mutual funds.

However, a major threat to investors being able to use this method of investment is the attempt by mutual funds to fine-tune and optimise SIPs. It sounds strange, but it's true. Let's see how.

Earlier in this series of articles, I had written about how SIPs were the best feature of mutual fund investing.

Through an SIP, you can invest a regular amount in a fund. It is typically, an equity fund, although SIPs are available for practically every fund. That's all you have to do, maths and psychology take care of the rest.
I had pointed out two important ways in which SIPs help you save more and get higher returns.

First, there's the math. When you invest a fixed sum regularly you are allocated more units when the markets are low. It's like buying anything else you will get more for the same amount of money when the price is low.
However, when you eventually sell it, each unit gets you the same price. This enhances your returns.

Second, there's the psychology. When the markets turn downwards, many investors don't invest, even though that is the best time to do so.They are wary of further drops and choose to wait to invest after the markets have reached the bottom.

The reverse is also true. When the markets are too high, they don't invest, waiting instead for the markets to dip. The recent months have seen a lot of such behaviour.

Obviously, these people are now torn between regret and stubbornly waiting for that dip to occur.

SIP investors tend to be immune to such impulses. Whether the markets rise or fall, the SIPs continue, simply because they are automatic and it takes some effort to stop them.

Sooner or later, as the markets go through their usual cycles, pushing up the value of investments, SIP investors start making good money. This teaches them the value of continuing with their SIPs in response to market conditions.

This is the beginning of a virtuous cycle, creating a new generation of investors who understand the value of regular investing.

The combined impact of the maths and psychology is amazing. Here are some numbers from a little experiment that I quoted earlier. I selected four equity funds that are old enough and calculated what would have happened if an in vestor continued investing a small SIP amount of Rs. 5,000 in these each month for 20 years.

The four funds yielded Rs. 1.29 crore, Rs. 1.85 crore, Rs. 1.21 crore and Rs.  2.05 crore respectively.

Keep in mind, that the total investment made in each case was a mere Rs. 12 lakh .

However, it's very easy to sabotage this, and that's exactly what many mutual funds are actively trying to do. They are promoting the idea that a plain and simple SIP is not good enough and that investors must do something more.

They suggest adding various embellishments to the SIP to make it better.
Generally speaking, these `enhanced' (in reality, degraded) SIPs engage in a form of market timing by modulating the investment based on market conditions.

These tricks are offered by many asset management companies (AMC) and even some distributors. One common trick is to increase or / decrease the SIP based on index levels or valuation of the markets.

Another tactic is to have an SIP, which flows into a debt fund when the market conditions are supposedly more suitable for such funds. At a later such funds.

At a later date, based on a predetermined set of rules, the money flow is shifted from the debt fund to an equity fund. There are other plans that vary the date of the investment based on similar rules.
 Mr. Dhirendra Kumar,

Each of these is offered by an AMC or distributor to enhance returns. They are sold by showing the investor some sort of a back calculation to prove that it's a superior way of investing. However, they miss the point entirely.

The real value of SIPs lies in the simplicity they bring to the table, and the handoff approach that they teach the investor. The message behind these supposedly enhanced SIPs is exactly the opposite.

They promote the idea that investing in mutual funds is a complex activity that requires constant attention and adjustment.

The only adjustment that one should make to an SIP is to increase the amount of the monthly investments as their income increases.

That's a natural increase, and the only one that makes sense. An SIP is a wonderful investment technique, which is based on the principle of keeping things simple.Avoiding complexity is an important goal, and one that you, as an investor, should never lose sight of.

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