Let's admit, Mutual Funds today are as mainstream as they have ever been. You've been hearing about them on your radio, TV, newspaper and various places on the internet (including this blog). There's a good likelihood, every time you've heard the mention of a Mutual Fund, it's followed by a powerful three lettered abbreviation, SIP.
S - Systematic; I - Investment; P - Plan.
All Fund houses, distributor and media talk so much of SIP that for the end investor Mutual Fund and SIP are pretty much synonymous. In fact, many of our investors think they invest in SIPs, not Mutual Funds. We thought we'd lay out a handy guide of what SIPs are, what they aren't and why everyone talks so much about them
What SIPs are:
SIP is basically a mandate, given to the fund house, to periodically invest in a scheme of your choice by deducting money directly from your bank account. It's only a mode of transaction. You very well might invest a fixed amount on the 1st of every month yourself, but not many of us are disciplined enough to do so. And that's the main USP of SIP. Investing in a disciplined manner over a long term period.
For eg: When you start a SIP with say, SBI Bluechip Fund, for ₹5000 on the 1st of every month - You are authorising SBI Fund house, to deduct ₹5000 every month from your bank account to invest in the Bluechip scheme with the price (NAV) applicable as of 1st of every month.
For any exit load, tax or return consideration, it's as good as you are making fresh investments on 1st of every month. It doesn't matter how long you've been running the SIP for.
What SIPs are not
Unfortunately, too many benefits of SIPs have been overhyped or misconstrued. While there are certainly great reasons to start a SIP, there are a couple of things we need to understand.
- SIP is not an investment strategy
- SIP is not a guarantee of high returns or even positive returns
- SIP in itself is not diversification
- SIP is not a separate scheme
- SIP is not a separate investment account
SIP is only an automated mode of a transaction in a scheme of your choice which induces discipline to invest, regardless of market levels. Nothing else.
Why are they so talked about then?
There are three entities in the entire process of your investment - The fund house, the intermediary and the investor. When you start thinking from the perspective of each of them, you'll start to appreciate why SIP is touted as a win-win for all the parties involved. But before we begin, let's pause and talk about Human Inertia.
That's correct. Human Inertia. It is a universal trait that all of us possess. Most of the times we don't bother to think about things that matter over the long term - like Insurance, Investments and Retirement Planning. It's necessary, but it's relatively boring as compared to watching a movie, catching up on your favourite TV series or shopping online for the next Big Dhamaka sale. Even when we realise the importance of the task at hand, we just postpone the decision to the next weekend, and the weekend after that, and so on until it's the next financial year already. Sounds familiar, doesn't it? We all do it.
Now let's move on to our main topic. The three party relationship that surrounds a SIP.
The Fund House
The fund house makes money on the assets (money) you invest with them. For every ₹100 you invest with them, a fixed percentage is charged by the fund house and is deducted directly from your investments, called the Expense ratio. Hence, the only metric important for them is how much money they manage. Of course, they hire the best fund manager to deliver the best returns (or at least try to), but it's not enough. Reason - Human Inertia and the procrastination to invest on our part. Thus, a SIP that gives them the mandate to deduct investor bank account and invest with them makes perfect sense for them. In fact, once a SIP is started, Human Inertia takes over again and there's a certain surety that the investor is not going to stop or cancel the SIP through its duration.
The intermediary makes money on your assets just like the fund house above. For every ₹100, the Fund house pays the intermediary a fixed percentage every year you stay invested in the schemes. In fact, an intermediary also gets an upfront commission which is earned at the time of initiating a new SIP. Come to think of it, it's likely that the intermediary may actually earn more than the fund house. So more or less, the reason for them pushing for SIPs is pretty much the same as above. To avoid Human Inertia, make the investor sign a one-time mandate for a SIP and let the commissions keep trickling through. Obviously, we are talking about agents who enable transactions in REGULAR plans of mutual funds. The advisors helping you invest in DIRECT plans do not get any commission and only do so for the reason below.
As described above, the Human Inertia is quite detrimental to our own well-being. More money is lost by not investing than by investing in poor securities. You can perhaps refer to our article on the same here. When you initiate a SIP, you are in an auto drive mode where you are making sure that you invest with discipline. Also, there's the added advantage of cost averaging. When you invest over a period of time, you have to worry less about overpaying for your purchase as the cost of purchase averages with each new SIP transaction each month. Many people think it's this rupee cost averaging 'strategy' that makes SIP attractive. It's not. It's a positive by-product. The only reason why a SIP works is that it makes us invest with discipline.
A SIP is nothing but an automated mode of investment. To get better returns, the investor still needs to research and periodically check the health of his portfolio. Human Inertia is our folly and hence, it is advisable to initiate a few SIPs, in DIRECT plans to avoid overpaying for making your money work for you.
Hope this helps