The truth about SIPs

A few days back, there was an article in this newspaper highlighting that equity mutual fund inflows have seen the ‘highest inflows in 4 months’. Net inflows in these funds had hit a low of Rs 2,258 crore in November 2022 but rose sharply in December to Rs 7,303 crore and Rs 12,546 crore in January. Over the last 12 months, the high was Rs 28,463 crore in March, and the low was the November figure above.

That’s quite a wide range, with the maximum being 12 times the minimum! Note that these are net inflows, that is, inflows minus the outflows. While these ups and downs are going on, SIP inflows rise steadily. December saw Rs 13,573 crore of SIP inflows which was the highest till that point, and January was a bit higher than that, setting another record. Broadly, this is the pattern of Indian equity mutual funds now. There are large (and ever larger) steady inflows from SIPs and through EPFO. These are countered by the volatility of the normal episodic investor’s investing and redemptions. However, the steady inflows are now large enough to counteract the outflows more than even when the redemptions are at a high, as they were in November.

This makes one wonder what exactly drives some investors to redeem heavily at some point. There are many reasons, but November’s exits make it clear that the one at work is the urge to get out when you have broken even. If you look at the markets’ trajectory during last year, November was when the equity markets shrugged off a dip and reached a short-term high. It was just the kind of time when nervous investors breathed a sigh of relief and rush for the exits. Along with the spurious notion of ‘profit-booking’, this kind of investor behaviour damages investors’ returns, but I guess there’s not much to be done about it. Of course, like many other sub-optimal choices that mutual fund investors make, this one, too, is driven by fund sellers.

The other issue is that of a curiously negative attitude about SIPs that are being encouraged by fund sellers and some ‘finfluencer’ types. Contrarian views always get a rise out of any audience, and criticising widely promoted ideas must be a good way of collecting a following. You will often hear that it makes no difference whether you have invested through a SIP or in a lump sum when you have been investing for a long period. Many Facebook posts and opinions floating around on social media seem to express this. Some fund distributors, too, promote this idea for reasons that are not hard to guess. It’s hardly a great discovery that the value of SIP investment changes by the same proportion that a lump sum investment does. If you have Rs 1 lakh accumulated in a fund and its NAV falls by 10 per cent, then the value will be Rs 90,000 regardless of whether you invested in a lump sum or SIP. This is not rocket science.

The first requirement for getting returns is to invest and keep investing a regular portion of your income and avoid getting tempted to do something else with that amount. The data above shows that SIP investors keep at it while others often stop investing. A monthly SIP is about something other than the maths of cost averaging but the psychology of steadily investing without interruption. It fits your income pattern and makes it likely that once you start it, you will not stop. Whether SIP has a better IRR than lump sum investing or not is an academic question fit for academics to write about. Those with a monthly salary do not have the option of investing in a lump sum. That’s the real reason SIPs generate wealth, and overactive fine-tuning of investment strategies does not.

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