Invest wisely | How to tell if mutual fund SIPs are not optimal

Investors love a good SIP. Last fiscal year's SIP (systematic investment plan) inflows were close to Rs 2,000 crore, and monthly SIP inflows in March 2024 were over Rs 19,000 crore. According to the Association of Investment Trusts of India, it increased five times from 2016 to 2017. (AMFI) data.

In February alone, 49.8 million new SIP accounts were opened and 21.33 million were closed. This indicates that almost 40 percent of SIPs may not be long-term.

So, is SIP really what the doctor ordered? Are there any situations where SIP is not the best choice?

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Here are some scenarios where you might run into slight issues with SIP.

a) If the savings using SIP do not match your goals.

b) Start a SIP, but panic and stop it due to market downturn (when you should have bought because the price is low). This is especially true for SIPs in small and mid-cap stocks.

c) We wait for the SIP to start and try to time the market bottom instead of just staying invested.

d) We make a fuss about whether we should do daily/weekly/monthly SIPs and what day of the month we should start them, rather than just being in the market.

SIP is not aligned with goals

Insufficient SIP Quantum may give you a sense of well-being, but it can leave you short when you need funds for your goals. Another problem is that rather than increasing his SIP quantum as his income increases, he often keeps his SIP quantum static. While the cost of living continues to rise, savings do not increase by the same amount, ultimately leading to a mismatch between goals and savings. However, if you top up, you'll see your savings potential change dramatically.

SIP for every cycle

SIP provides best results when continued through all market cycles. This is because “time on the market” often trumps “market timing,” especially when it comes to this investment strategy. So even if he sees relatively poor returns in his first five years, he is likely to see better returns on a 10-year basis. Data also shows that diversification is most effective in mid- and small-cap stocks.

Note: Past performance may or may not be maintained in the future. However, for best results, the benefits of continuing to use his SIP over the long term have been shown, especially during times of high volatility.

Delay SIP to time the market

We often see investors postponing SIPs to time the market.

Research shows that starting a SIP at the bottom of the market rather than the top increases returns (in percentage terms) slightly, but the total savings are often much lower due to the shorter savings period. The difference becomes even smaller if the market takes longer to reach the bottom.

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To take an example from the recent coronavirus crisis, if one person starts a SIP of Rs 10,000 per month from January 2020, and another starts the same at the bottom (March 2020), then 1 Monthly investment is worth Rs 10,000. 660,000 and March's are worth Rs 630,000, representing returns of 13.7 per cent and 13.9 per cent, respectively.

any day is fine

Data shows that the day of the month in which you start your SIP has minimal impact on your earnings. The important thing is to research, plan, and get started.

In summary, although historical data does not predict future returns, we find that SIPs provide the greatest benefits when regularly replenished in line with goals and maintained over the long term. Otherwise, it may actually turn out to be suboptimal.