Skip to main content

SIP Misconceptions


As the mutual fund industry celebrates record assets under management in June 2017, there's a new phenomenon that has contributed to this feat - the runaway popularity of systematic investment plans (SIPs). But as with all good investment ideas, SIPs have also fallen victim to hype and misconception. Here, we bust three common myths about this investment tool.


SIPs protect you from losing money 
SIPs are not a separate asset class like bank deposits, equity funds or debt funds. They are only a method or tool to invest in the asset class of your choice. SIPs reduce the risk of capital losses in equity funds but don't eliminate it.


If you start an SIP at a market high and the market falls sharply after you began investing, you will lose capital even on an SIP investment. We conducted a comprehensive study on the performance of SIPs across all diversified equity funds for the last 20 years recently. The study showed that it is only on SIPs that run on for four years or more that capital losses were a rare possibility. This again is a function of how equity markets in India have behaved. Because bear markets in the last two decades have never lasted for more than four years, SIPs too never made losses if continued for over four years.


Therefore, while investing in SIPs be aware that you still take on the risks of the asset class you are choosing. If you are doing SIPs in large-cap equity funds, there's some risk of a capital loss. If the SIP is in mid- or small-cap funds, the risk of that loss is higher. If you are running an SIP directly in stocks, there's an even higher probability of losses.


Start SIPs in beaten-down sector funds 
Quite a few seasoned investors are enamoured of using the SIP route to invest in sector or thematic funds. But SIPs are, in reality, a very sub-optimal way to invest in sector funds. This is because sector funds, by their very nature, are designed to deliver returns for investors over short market phases of three-five years.


Stocks in a specific sector typically outperform the market when the sector is enjoying exceptional profit growth due to an upturn in the business cycle. The market then uses this opportunity to re-rate the valuation multiples of such stocks. However, after a three- or four-year spell of good returns, sector fads in the market usually fizzle out. A big meltdown then follows, wiping out all the previous gains.


Investors in sector funds, therefore, need to get their timing exactly right to capture this outperformance. They need to invest when the sector is beaten down and exit when the fad is at its peak.


Using the SIP route, however, works against this process. Just assume you think IT stocks are beaten down today and start an SIP in technology funds. The sector may be cheap when you kick off your SIP, but what's the guarantee that stock valuations won't run up even as your SIP is continuing?


The other problem with SIPs is that by putting your decisions on autopilot, they take away your incentive to track the markets closely. This can deplete your returns in sector funds. Before you know it, the sector may have peaked out and head downhill. So if you think IT or pharma stocks offer great value today, scrounge up the lump-sum money you can and invest it in these sector funds.


But if you lack the conviction to make this big bet, it is best to avoid IT or pharma funds altogether and stick to diversified-equity funds. No point in opting for a high-risk investment and then trying to hedge your bets!


Stock SIPs are better than fund SIPs
If SIPs work so well in mutual funds, won't they work even better with direct equity? After all, stocks can earn multi-bagger returns which few equity funds can deliver. That's an oft-heard argument in a bull market. In fact, many brokerages now offer daily or monthly SIPs on your favourite stocks.


Yes, stock SIPs can help average your buy price. But while signing up for them, you need to keep three checks in mind.


One, when you accumulate a stock via SIP, you can end up owning too much of it in your portfolio if you don't keep a careful watch on the individual stock or sector weights.


When you invest in a stock, the exposure you take to it usually depends on how bullish you are about its prospects and how it compares to the other holdings in your portfolio. However, it is harder to keep track of relative portfolio weights when you invest through SIPs as compared to lump-sum purchases.


Two, multi-bagger returns in the market come from identifying stocks that are undiscovered, entering them at low prices and then tracking the business closely to ensure that it is meeting expectations. SIPs, by nature, are designed to put your investment on auto pilot. This may work reasonably well in a fund, where the fund manager takes care of your portfolio. But when you do a stock SIP, close monitoring of returns on your part is essential to avoid bets that backfire.


Three, if you're a seasoned investor, you would know that no stock is a perpetual 'buy' at any price. Often, stocks or sectors that appear to be great buys at one point in time turn out to be avoidable just a few months later. When you sign up for SIP in a mutual fund, you are buying into a professionally managed portfolio, where the identity of individual stocks can keep changing. The fund manager actively reshuffles his bets at different market levels based on the options available. But with a stock SIP, it would be up to you to ensure that the stocks that you're regularly buying are good acquisitions over time. You will have to keep a close watch on both the company's performance and the sector's to ensure that accumulating it remains a good idea.


To sum up, SIPs are great investment tools when you use them wisely, stay the course and are fully aware of the risks of equity investing. But they aren't a magic pill that will deliver great returns, irrespective of the asset class or investment situation.







Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds. Save Tax Get Rich

Top 10 Tax Saver Mutual Funds for 2018

Best 10 ELSS Mutual Funds to Invest in India for 2018

1. DSP BlackRock Tax Saver Fund

2. Tata India Tax Savings Fund 

3. Birla Sun Life Tax Relief 96

4. Sundaram Diversified Equity Fund

5. ICICI Prudential Long Term Equity Fund

6. Invesco India Tax Plan

7. Franklin India TaxShield 

8. Reliance Tax Saver (ELSS) Fund

9. BNP Paribas Long Term Equity Fund

10. Axis Tax Saver Fund


Invest in Best Performing 2018 Tax Saver Mutual Funds Online

Invest Best Tax Saver Mutual Funds Online

Download Top Tax Saver Mutual Funds Application Forms


For further information contact SaveTaxGetRich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

OR

Call us on 94 8300 8300


Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...

Term insurance

Term insurance may not be the most-marketed product by life cos, but it’s a must-have in today’s risk-prone lifestyle WHEN was the last time your insurance agent sold a term plan to you? It’s not a very popular policy among agents, as their commission in absolute terms is low because of the low-premium. Just as agents have their self interests in mind while selling, you need to make your own decision about your insurance needs, which are unique to your family. COST ADVANTAGE A term plan is pure protection. It is the cheapest type of life insurance policy. But what you see might not be what you get, most insurers have a range of health parameters for standard rates. If any of your health parameters — weight, blood pressure for instance fall outside this range, you will pay more. For some companies, the standard range is very narrow. EARLY BIRD GAINS A 30-year-old will pay 15% more premium than a 25-year-old. At 40, the premium is double of what is applicable for a 25-year old, points...

Stock Dividend Yields

During a bull run, it’s very easy to ignore stocks with high dividend yields. After all, what could be more enticing than a growth stock? But in times of crisis, these boring ones tend to be the most sought after. The reason being that not only do dividends provide a cushion when the market is in the doldrums but such stocks also tend to fall less. The lure of dividend yield stocks is not easy to ignore. These stocks offer capital appreciation as well as cash payments. But logically, any company that pays a substantial portion of its earnings in dividends is reinvesting less and, therefore, would grow at a slower pace. So the trade-off is between higher dividend yields for lower earnings growth. On the other hand, companies with high growth potential and volatile earnings tend to pay less by way of dividends, if at all. Such companies would rather reinvest their earnings to sustain their growth. The capital appreciation of growth stocks is obviously higher than in dividend yield ones. ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now