Understanding SIP

Before deliberating upon the safety issue of SIP, let’s first understand about the SIP as a financial vehicle.
Understanding SIP

Productization of financial services has become order of the day. Repacking and relaunch of old financial products as well as launch of new schemes to woo investors into the financial market is a regular phenomenon.  After fast-moving consumer goods (FMGC) advertising (ad), it's the financial product ad campaigns which we come across at large scale in media channels – be it print or electronic. 

One of the most advertised financial product targeting small retail investors is the systematic investment plan (SIP) being nowadays sold by various mutual fund distributors and financial planners like vegetables. Every now and then, you find series of attractive ads on television channels inviting you to invest in SIP to 'create wealth' and simultaneously preaching it as the safest vehicle of investment in equities market. Notably, over a period of time through aggressive media campaigns, these systematic investment plans (SIPs) are projected as the most convenient and efficient way to invest in the equity markets.

The kind of tremendous hype created for SIP and successfully luring small investors to invest in the scheme makes a sense today to have a look at the scenario around this method of investment. Is SIP safest route of investment in shares to create wealth over the long term?

Before deliberating upon the safety issue of SIP, let's first understand about the SIP as a financial vehicle.

A systematic regular investment plan is similar to a bank recurring deposit (RD) scheme. Under a RD scheme a fixed amount of money is deposited monthly for a fixed period of time ranging from one year to ten years. In SIP, fixed amount of money is deposited mostly monthly or quarterly in a mutual fund scheme. It allows an investor to deposit small amount at regular periodic intervals. The investor is not required to go for a single heavy one-time investment. The amount pooled with mutual fund distributor through SIP is invested by the fund managers in the equity market on behalf of the SIP investor.

In other words, when an investor enrolls for a SIP, he/she essentially entrust the amount of investment  to a professional whose full-time job is to manage people's money, for which he gets paid. This ensures that the investment is looked after all the time. The investors neither needs to track the markets on a daily basis, nor do they need to take calls on individual stocks as they have opted for a professional fund manager.

The mutual fund managers sell this product on three major attractions: rupee cost averaging, regularity of investments and power of compounding. Rupee cost averaging is buying more shares when prices are low and purchasing less when the prices are high.  Regularity of Investments inculcates saving habit for long term among the investors and  instills financial discipline in them. SIP does not encourage timing and speculation in the markets. Then there is the  power of compounding, which means over long periods of time, earnings on even a small investment yield big difference at the end as these small earnings go on compounding.

Since investment through SIP is directly linked to the equity market, it would yield good results when the market is rising, which we call Bull Market. When the market is volatile and the share market ultimately is moving up, SIP again proves beneficial. This volatility coupled with market ultimately going up would help the SIP investor to reap the benefit of 'rupee cost averaging'. Precisely, such condition would help to get best price averaging.

However, in falling market scenario, which is known as a Bear Market condition, investment through SIP would not yield positive results. In short, SIP also carries risk of losing money and its performance, positive or negative, is directly dependent on the market condition. If equity market performs bullish, SIP would yield nice returns on investment. In bear market conditions, SIP won't prove magical. The investor would have to bear the brunt.

So, let the investors, particularly the small gullible investors don't fall in the trap of mutual fund distributors or financial planners that SIP is risk-free. SIP is also loaded with risk and treat it just another vehicle of investing. Yes, it's safest route of investment, but for the for mutual fund managers and financial planners. They get assured continuous money for the long term on which they earn fees and commissions.

Meanwhile, some mutual fund distributors selling SIP now allow the investors 'temporary pause' facility in SIP investment. This means, you can stop paying installments under s systematic investment plan for some specific time and then restart investing. Different fund managers have different conditions attached to this facility. But it would not be wise for a SIP investor to pause his/her investment and then restart. It would definitely be coming at a cost. Remember there are no free lunches in financial system.

(The views are of the author and not that of the institution he works for)

No stories found.
Greater Kashmir