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    Should you stay with your mutual fund SIP or run away from it now?

    Synopsis

    If you see Nifty or midcap or smallcap indices, they have not gone anywhere in last so many years. In the recent past, Nifty returns have been driven by one stock – Reliance Industries.

    R Venkataraman

    MD and Co-Promoter, IIFL Group

    Alumnus of IIT Kharagpur and IIM Bangalore, Venkataraman has been instrumental in IIFL’s rise as a financial conglomerate. He is one of the leading thought leaders in Indian financial services industry. Besides running marathons, he loves the pulse of the equity market

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    The headlines are screaming of a fall in mutual fund investments and cancellation of SIPs (systematic investment plans). Depending on who you follow on Twitter, SIPs are mostly described as a worthless investment plan. Few have articulated that over last six years, SIP returns are at low single digits. If returns are low, why take the SIP route? If SIP is illogical, then why have AMCs spent so much time and energy in propagating a wrong tool to retail investors?

    Let me start with a disclaimer. I invest in mutual funds through SIPs and continue to do so. This does not mean I do not invest in lumpsum, or in direct stocks. Does this make my returns any different?

    Unfortunately, the answer is No.

    Let me share two personal insights. One from my investing journey and another from my personal experience with SIPs. I started my professional life with ICICI, the development finance institution in 1991, just when the Harshad Mehta bull run was starting.

    After the bull run ended in 1992, the market remained lacklustre till the IT-fuelled bull run of 1998. A senior colleague at ICICI was a very smart and savvy investor and a role model of sorts. He was rumoured to have made a killing in the stock market and was known to spot the trends early on and ride the same.

    Articulating an investment rationale to him, would give ‘ bachcha’ analysts like us the heebie-jeebies as he always took a contrarian position and argued passionately. Many of us changed our views in 20 minutes or even lesser after hearing him speak on a sector or stock. His pet strategy was always start with the sector. If the sectoral dynamics were in doldrums, it was close to impossible to benefit from companies in that sector.

    Reminiscences of a Stock Operator – the best book I have read on stock markets till date was also introduced to me by him. On a trip from Nasik to Mumbai after a company visit, I had the privilege of a long chat in our car and he highlighted the fact that portfolio returns and market returns are linked.

    Those were days, when alpha and beta were theoretical concepts, which I forgot after passing the exam. During that journey I truly understood these concepts. When I praised him for his savvy money making skills, he politely told me – during Harshad Mehta bull run, it was easy to make money. All one had to do was buy stocks and keep them. The test of an investor was came in 1992 when the market went nowhere. During that time, almost everyone’s portfolios were hurt, including his.

    When the market goes nowhere, it is difficult to make money for most investors, professional or retail. As I have written earlier, if you see Nifty or midcap or smallcap indices, they have not gone anywhere in last so many years. In the recent past, Nifty returns have been driven by one stock – Reliance Industries.

    When Nifty and the stock market are lacklustre, how would one expect SIPs to do well?

    My second anecdote is about a multi-year SIP I had done in a thematic fund. For fears of ruffling feathers (I am a broker, cannot afford to) the name is a secret, but trust me – the name was big. After diligently paying month after month, I barely recovered my invested capital. Who does not get frustrated when money is not made? I learnt that thematic funds are good funds provided you exit them when the theme falls out of favour. Reality is that I could have exited with gains but I over-stayed. And had I not adopted the SIP route, I would have probably lost more money.

    Based on these two lessons, let me share my two bits on SIPs:
    • SIP is a good investing methodology for investors. The key proposition is its simplicity. It is like the recurring deposit (RD) of olden times, when every month some money was swept into RD.
    • This discipline of investing every month automatically ensures that greed and fear are kept out of the equation. Timing is for experts and not for most of us. Remember, to change course in case you are in a thematic fund which has lost favour.
    • Do not be depressed by seeing poor SIP returns. SIP is an investment methodology. It can help little if underlying asset does poorly. Reversal to mean happens and when it happens you will feel happy and get rewarded.
    • The best time to invest is when markets are doing badly. In the present situation, do not cancel your SIPs and when the bull run starts in 2021 – do not get tempted to increase randomly.
    • And if you think you can do better than a professional fund manager – think again. Investing in direct equities is not as easy as it appears from the stories a friend may tell you about quadrupling money based on learnings from WhatsApp university.

    Stay safe. Stay invested and by doing so over a long term, you should be able to accumulate a higher corpus thanks to the power of compounding.

    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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