Following the good run up our stock markets had in 2014-15, the confidence among retail investors have increased considerably. On a normal course when the markets correct, even though it is a regular process and will get back and move up soon, people used to get weary of losses. They used to stop SIP’s and pull out their investments.
And most of the times the timing would be against them, when the decision is made to get in, that would be the time when the markets were exhausted and begin to move down, and when they decide that, enough of the pain from losses and get out, that will be the time the markets will begin to move up into a new bull market.
No one can time the markets perfectly, so, one of the methods to ensure that we are there for the bigger haul is to stay invested, and for that SIP is a best way to go. It helps us have the cost averaging, and help us achieve a better return than the benchmark, say the SENSEX.
For the first time in the history of the Indian markets, retail investors have maturity; they have decided to stay invested using the SIP route. There is a 26% increase in SIP’s registered this year and the average live SIP has moved up from ₹3368.40 to ₹3449.80.
The increase in investments to Equities is not only because people have become smart, it also because of the fact that other investment avenues like banks and real estate are having lack lustre performance and is forcing them to move into equities. Unlike the earlier years, if the retail investors stay invested for a longer period, they will taste the richness of equities and will continue to have it as one of their preferred investment asset.
What about the risk?
As we have the advantage of cost averaging which will get us more units when the markets are down and lesser units when the markets are up, so that we are at the receiving end always. Does that mean the investment is zero risk?
No, risk still remains the same, there was a research made on SIP’s with the SENSEX for a 10 year period, the returns were not phenomenal, it was the same as the index. Then, fund managers complained, “Don’t check the returns with the SENSEX, instead use the NAV of any Mutual Fund”. So it went on and got tracked using the oldest NAV based Mutual Fund scheme in India – UTI Mastershare. The chart above shows that, it is mimicking the SENSEX, the returns were from a low of -6% to a high of 28%, proving that Long term SIP’s are not risk free.
How we can make it at our advantage?
Select the top performing schemes for investment and let the SIP done only for 12 months. After 12 months, check whether the same schemes continue to lead, if not, move to the next best scheme. The existing investment shall continue to be invested until the last SIP clears the exit load factor, then move the funds to the prevailing top performing funds. Rarely do Mutual Fund schemes continue to be top performers for more than 12-15 months, leaderships change as the markets move.
This activity will force a person to review his investments at least once a year and also ensure that the growth is healthy. If there is a prolonged downtrend in the markets, one can even move from Equity to debt and return back to Equity when the bullish sentiments comes back, which will require a little extra knowledge to do, which your fund manager can help you with.
So, any investment, if left for a longer period assuming that it will grow on its own, will only give average returns, which will mostly match the prevailing bank rates and would always be below the inflation rate.