A few days ago, I was listening to a senior investment industry executive lament about investors’ unreasonable expectations from SIPs. Normally, I don’t take such complaints seriously. In their private conversations, many businessmen (no matter what their business) find customers unreasonable. Wouldn’t it be so much better if customers just gave their money and didn’t actually ask for anything in exchange?
However, the person I was talking to is not in that category. He’s someone who has genuinely worked hard for investors over long years in investment management. And here he was, basically confessing me that it wasn’t possible to deliver what may customers asked for, specifically because customers had expectations that were impossible. And you know what, he was right.
Here’s the problem, as he is facing it now. Over the last couple of years there’s been a huge increase in the number of people who are investing in mutual funds through SIPs. That’s great, but most of these investments are now under water. If you have an SIP that started two years ago in September 2009 in a fund that just tracked the Sensex, then your rate of return is now -6 per cent. If you had invested Rs 10,000 a month over the last 24 months then your kitty would be worth Rs 2.25 lakh now. This doesn’t quite fit in with the expectations that many of these investors had.
Unfortunately, a proportion of investors seem to have the expectation that an SIP is a sort of a magical device that can protect them from all losses. It’s not. An SIP means that you keep investing though the ups and downs of the markets, ensuring that at least part of your investment is made when the markets are down. In the long run (and in equity investments, long run means three years at a minimum), this leads to higher profits. But to my mind, the real advantage of SIPs is as a psychological device that keeps you investing when the markets are down because, you know ‘buy low’ is the more important half of ‘buy low sell high’.