Nothing can be gained by making an SIP complex


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In most products, features are thought to be a good thing. However, when it comes to financial products, this passion for features is a problem, since features tend to obscure the inherent attributes of a product. Worse, when the disease of featuritis afflicts financial concepts like mutual fund SIPs (Systematic Investment Plans), whose very reason for existence is to provide simplicity, then the problem becomes serious. It’s easy to get involved in overcomplex analysis and lose sight of what is important. Some time ago, I got an email from an investor who said he had read in an article somewhere that that if one increased one’s monthly SIP amount by 10 per cent every year, then the final value would increase by 45 per cent. The investor wanted to know if this was true and if it was, then should this 10 per cent increase be a simple increase or a compounded one. I didn’t quite know how to respond. At one level, it’s good to see that a saver is taking his investments seriously and is examining what he is doing, and what effect it is producing. However, there’s a problem because there’s a touch of ritualism. Someone is applying the maths slavishly without understanding what is going on. Firstly, settling the answer to this question is a fairly straightforward arithmetic exercise, although the idea is dubious even without running any numbers. Secondly, even though it’s maths is not quite there, what the original article seems to be trying to convince readers is, if you invest more then you will end up with more money. One can hardly argue with that, even if it is not some magical number produced by an investment ritual. However, the bigger problem is the idea that there is some magic to the very simple concept of investing in a volatile asset by averaging your cost. The idea of a SIP is that you should keep investing a fixed sum regularly in an equity fund, regardless of market conditions. Over long-term, you end up buying more units when the markets are down and fewer when the markets are up. Thus, your average purchase price is much likelier to be higher than what it would have been otherwise.Therefore, when the time comes to redeem your investments, they are very likely to be worth more than what they would have been. There are no guarantees, and there are no fixed formulae of expected returns. Hypothetically, if stock markets were to go into a long-term stagnation or decline, then it won’t work out. But in the real world, since you are investing in something that has high volatility but a general trend upwards, you’ll come out well. However, the value of a SIP is not in the maths, but the psychology. It’s the simplest way of investing regularly and getting good returns from equity. Mutual fund markers have exploited the attraction that complex, feature-laden investment options have for investors. There are a number of SIP plans to which market-timing has been added as a feature. If there’s one investment technique where keeping it simple and avoiding every complexity is of the highest value, it’s SIPs.

Courtesy By: economictimes.indiatimes.com

Date: 2018-11-01 11:22:45