In the field of personal finance a lot of experts are endorsing to use Systematic Investment Plan (SIP) as an investment strategy to accumulate wealth.
However, there are some pertinent questions that an investor needs to answer before jumping onto the SIP bandwagon.
Some of them are:
Has Systematic Investment Plan (SIP) worked in the past?
What if more people start investing using SIP?
Will SIP continue to work in the future?
Is starting Systematic Investment Plan in few mutual fund schemes really going to work in the long run?
Let’s understand the behavioural aspect of investment decisions made by majority of people.
If we evaluate our attitude towards the world of investment planning, it will give an impression that our investment decisions are guided by trends which prevails in our society/market.
This reminds me of the first commercial of ‘Siksha.com’ which mimics how ‘The Herd Mentality’ (THM) works in our society. The same mentality influences our investment decisions as well.
Specific instances of trends which were a result of ‘The Herd Mentality’ can be cited when investors started to use insurance products as a tool of savings and investment planning.
And as we started to understand the difference between insurance and investment, we were knocked by the ULIP era (Unit Linked Insurance Plan), where a market linked insurance product looked more attractive than an endowment insurance plan.
If we evaluate carefully, the recent trend is to invest through SIP’s (Systematic Investment Plan’s) which reveals the same mentality.
There is no doubt about the fact that SIP’s are a safer and more convenient way of investing over the long term.
However, merely starting an Systematic Investment Plan may not deliver the desired returns over the long run.
To evaluate this let us see the performance of SIP’s (Index Fund) over the recent years:
If we consider an example of an investor, who has started a monthly SIP of Rs. 10,000 p.m. in a SENSEX (Benchmark Index) fund from January, 2007 and continued it till December, 2015.
He would end up investing a sum of Rs. 10.8 Lacs over the period of 9 years. The corpus for the same would grow to Rs. 15.27 Lacs in Sensex giving an annualized return of just 7.50%.
The average annualized CPI inflation form 2007 – 2015 has been 8.76%. And the return of 7.5% actually yields a negative return of approx. 1% in real terms. As a result the above investment can’t even retain its purchasing power.
Any prudent investor will have the following questions after following this strategy:-
Why more risk has not resulted in higher returns?
Is Systematic Investment Plan really building wealth over the long term?
When similar returns can be derived from Fixed Deposit why should one opt for equity linked SIP’s?
Is there a strategy to enhance our returns by investing in SIP’s?
While it's tempting to follow the newest investment trends, an investor is generally better off steering clear of the ‘herd’.
Just because everyone is jumping on a certain investment ‘bandwagon’ doesn't necessarily mean the strategy is correct.
Therefore, it is always prudent do your own homework before following any investment trend.
Just remember that particular investments favoured by ‘The Herd’ can easily become overvalued.
The main reason for ‘overvaluation’ is high level of optimism and not the underlying fundamentals.
If we keep aside our conventional attitude of ‘The Herd Mentality’ for a moment and evaluate whether the above questions can be answered by what we call the SIP strategy?
SIP strategy is a fusion of SIP with a ‘Strategic Implementation Plan’.
Wherein, SIP’s gives us the discipline of regular savings/investment.
‘Strategic Implementation Plan’ helps you to review and balance your portfolio within different asset class to protect downside and enhance your returns.
The SIP strategy is basically about how you can enhance your returns by utilizing the market cycles which in turn deploy your financial resources in a prudent and efficient way.
According to SIP strategy our asset allocation decision is very critical
. Getting it ‘right at the right time’ will act as the ‘key differentiator’.
There are many asset classes, including cash, bonds/FD, stocks, real estate and precious metals. And over the period of time, each asset class has demonstrated certain return and volatility characteristics.
The greatest challenge is to align our asset portfolio in line with the behaviour of these asset classes.
Our proprietary investment algorithm called Finatoz Timing Model (FTM) follows the principle of SIP2 strategy which periodically aligns your portfolio thereby enhancing the probability to generate better returns.
For you an individual investor a wiser decision would be to take the help of professionals or financial planners who are capable of doing it.
For investors who want to manage their investments on their own, then investing in risky assets may not be a good strategy for you as it might result loss of existing investment.