Getting Your SIPs Right

The Systematic Investment Plan (SIP) has for long been promoted as a superior investing tool for retail investors. On the one hand, it instills discipline and, on the other, it protects investors from entering the volatile equity markets at the wrong time. In general, the suitability of this approach has been accepted as it finds favour among investors, distributors as well as asset management companies (AMCs).

The wisdom behind this tool has several facets, and not just performance. But much like water that follows the easiest path, this concept has been sold merely on the premise of numbers. This narrow approach to presenting an otherwise profound idea seems to have contributed to the fall in new SIP accounts.

The rate of addition of new SIP accounts peaked at around 250,000 in July 2011. That has since steadily declined by more than 50 per cent to 125,000 in March 2012. More worrisome is the fact that many existing SIP investors have discontinued their accounts. The net addition of new SIP accounts in the industry has therefore turned negative month after month. The total number of active SIP accounts has fallen from 4.6 million to 4.3 million during FY2012. While poor market sentiment is an explanation, the rapid decline in SIP accounts clearly indicates the need for a better case to promote SIP as a concept.

The fall in SIP accounts is not only counter-intuitive, but also self-defeating for investors. In subdued markets, investors should be advised to increase allocation to equity for cost averaging. The AMCs have propagated virtues of investing systematically and so have the advisors. If all the stakeholders agree, there should have been no reason for a slowdown in the SIP numbers. What is the basic premise for offering SIP to investors. Is it merely for performance? Cost averaging? Investing discipline?

The proposition for SIP has to be more encompassing. Historical performance is important, but not the only consideration. It is critical to articulate the discipline and cost-averaging aspects. The need to hold investors during tough market conditions is at the heart of the success of SIP. At low market levels, a lower cost of acquisition pulls the average down, thereby making the overall approach successful. Quite a lot has been written and spoken about the power of compounding and rightfully so, but similar emphasis needs to be laid upon how cost averaging works. Till such time as this is not central to the case for SIP, the investors will make such reactive errors.

The next important step is to link SIPs to financial goals and target values rather than market levels. It is my view that financial advisory will emerge as the next important channel of distribution for the mutual fund industry. While it appears largely focused on the high net worth individuals (HNI) segment, an extension to the mass affluent and a large middle class in the future looks like a natural progression. Hopefully, as a result, a financial plan will be the guiding tool for allocation. SIPs will play a crucial role in linking financial goals to personal circumstances. SIPs then will not be a mere tool for investing over some years, but a lifelong habit.

It will not be wrong to say that penetration of mutual funds is in many ways linked to the success and acceptance of the SIP concept in India. It is the need of the hour to offer SIP for the cost averaging it facilitates, the long-term discipline it instils, and not merely as a comparison of numbers. After the product and the asset manager have been selected, it is discipline and patience that will make all the difference.

The author is managing director & CEO, ICICI Prudential AMC

(This story was published in Businessworld Issue Dated 30-04-2012)