Dhirendra, SIP returns for the past one year haven't been much well. In fact, I can go ahead and say that for the three years, it hasn't been performing well. This has brought some anxiety among investors. Would you like to throw some light on this?
Dhirendra: Yes, I would say that it is important to understand what SIP is. It doesn't ensure a positive guaranteed return. SIP is not a magic or a trick that if you have made investments in it, it's your right to actually expect positive returns. Nevertheless, SIP is valuable and works out mostly because it takes the emotion out of your investment. Most people stop investing in bad times. So, when you are on a methodical investment plan, you invest through the bad times, which is very critical. No timing is involved and it is easy to implement. It fits with your income cycle-we earn our salary every month; we pay our EMIs every month; then, why should not invest every month?
But SIP is useless if you would be doing it only in the good market or only during the bad market. SIP is useful only if you do it through the full market cycle, which can be of three to five years. Therefore, we keep saying to put only your long-term money in equity. If you do it through a full-market cycle, you will see the benefit of it. It will beat fixed-income and inflation.
For a very different reason, SIP in equity is a general bet on the economy. If a country does well and the economy does well, then you will make more money. Short-term noise, short-term underperformance and short-term poor performance by companies will reflect on them. But over a longer period of time, the general economy would do well, which is being known as the India tailwind. After all, businesses are not run on a quarter-to-quarter or day-to-day basis.
So, what I am saying is that it is a very powerful tool. It's a very convenient thing. It is democratising investments to investors, which otherwise they won't do. So, keep your faith, keep your calm and carry on. Just evaluating it on a daily, yearly or 18-month basis will not work. But yes, if you have done it over a full market cycle, you will see the pay-off.
If you could elaborate or demonstrate that with an example, it would be nice. For example, if I am investing today when the market is high and I am buying something for Rs 100, will there come a time when I will buy it for Rs 80 also?
Dhirendra: Yes, right now you are buying it at Rs 80. In fact, in the past one year, none of the equity funds have made money. But why you should stick to your SIPs is because if you are waiting for a good market phase, you will never invest in a bad market. In a bad market, negative noise is so strong that it will always scare you and keep you out of the market. The real promise of equity is also its biggest threat, which is most of the equity return is generated when you least expect it and that is the time when most of the investors are out of the market.
Can I safely say that it's a tool to reduce risk?
Dhirendra: Absolutely! Even if someone has Rs 20 lakh, he or she should average it. Because the risk of catching a market high can be devastating. If you have Rs 20 lakh or 30 lakh as your retirement corpus, you put them in the market as a lump sum, a 15 per cent decline will scare you very much. And it will drive you out of the market, depriving you of all the opportunities. So, spread your risk by doing SIP.
I was reading somewhere that the four most dangerous words in investing are - this time it's different.
Dhirendra: Don't get attracted by any slogan. I keep repeating that we should try and bank on the things that are controllable. We don't have any control over the economy, external events, interest rates and so on. If you have a set of principles and a belief system, just reinforce it. You really need to believe it for at least one full-market cycle.
Why are the SIPs providing negative returns?
Dhirendra: No, SIP is not the reason for negative returns. You are just averaging and it is the market that has not gone up. And I think the investor should be happy because if I am in the accumulation phase and investing for the next 20 years, I would like the market to be down for all these periods, and only do well in the 20th year when I need the money. But it is not possible and it can never happen.
Any final piece of advice that you would like to give to the investors?
Dhirendra: Make sure that you are investing regularly and continue your SIP even in a bad market. Also, make sure that you are not only restraining yourself from stopping it but also increasing the contribution with a rise in your income. And don't pull out your money midway unless you need it for an emergency.
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This article was originally published on March 25, 2019.
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