In the current investment climate, SIP investing has become my favourite topic but it's something that investors need to take to heart. There's a wide variety of disingenuous anti-investment propaganda that's going on and it can be dangerous for investors to pay attention to it. In recent weeks, there has been a spate of news articles about how SIP investments in many funds have not generated impressive returns over the last five years or so. There have even been some particularly misguided articles that ask the question of whether investors should stop their SIPs. Even though these articles have generally concluded that SIPs should not be stopped, the mere discussion of such a topic at a time when the stock markets are stagnant implies a dangerous lack of understanding of what am SIP is for. In fact, it might make sense to ask this question at an opposite time, i.e., when the markets are at a high point and have gone up very rapidly, although the answer would still be a resounding no.
At this point of time, of the 586 equity mutual funds of all types that we are tracking and which have a track record of greater than five years, the SIP returns over that period are positive for 549 funds. At a purportedly disastrous time for equity investing, when there's daily breast-beating about investment returns across the media, half the funds have returns of over 6.5 per cent and one fourth have a return of 7.5 per cent and above. 6.5 per cent is the equivalent of 1.37 times in five years. Equity investing has its ups and downs, and while this looks like a somewhat stagnant phase, I'm hard pressed to locate a disaster scenario here. I mean, we've lived through the 2008-09 period, when more than half the value of investments evaporated in a matter of weeks so any lamentations about these SIP returns leaves me sceptical about what exactly is being said and why.
In a way, anyone who understands the ebb and flow of equity investments, myself included, does not really care about this daily noise. We've seen enough over the last couple of decades to understand quite well that not only is this a time to stay invested, it's an opportunity to continue investing, something that is best done by continuing steadfastly with one's SIPs, or indeed increasing them.
It's true that except for if one ignores market crashes like 2008, then currently, the broad five year SIP returns of equity funds are at a low level. That's the result of sluggish but growing equity values during this period. Sluggishly growing equity prices, with phases of stagnation but no deep crash are actually almost the worst case for SIP returns. If the markets crash, then SIPs that are done during that low phase eventually lead to a big boost for returns. This sounds like a joke but if I'm going to be investing for five years then the best situation for me would be for the markets to be down in the dumps for four years and then rise strongly in the fifth year. Conversely, a stagnant market that eventually declines a bit at the end would be the worst case. What we are seeing now is something like that, and yet returns are reasonable. It is of the utmost importance that investors who have a multi-year perspective keep investing during this time because the foundation of future high returns are being laid now.
Remember that the idea of an SIP is that while the general direction of equities is upwards, we cannot predict the fluctuations that values may face as part of the overall trend. Instead of trying to do this stop-start, one must regularly invest through SIPs. As time goes by and the investment's NAV goes up or down, the volatility will actually ensure that when the NAV is low, you will acquire a larger number of units. Eventually, this is what will boost your returns.
This is a time to stay the course and not get misguided about whether SIPs are good for your financial health.