Once upon a time, equity mutual funds used to go into a half dead zombie-like state whenever the equity markets would get shaky. Savers would stop investing and fresh inflows would dry up. Some of them would start panicking and pull out their investments. At every little bump up, even more investors would redeem their money. Advisors and analysts would go hoarse asking investors to stay put, but their entreaties would generally not be heard. Hardly anyone would be willing to pay attention to the fact that these downturns or stagnant phases were the best times to invest.
The solution to this madness was of course SIP investing. I've long been writing that SIP investing is just as much about the psychology of the individual as it is about the maths of investing. Something like a decade ago, I wrote this: SIPs are also a great psychological help while investing. Investors inevitably try to time the market. When the market falls, they sell and they don't invest any more. When it rises, they invest more. This is the opposite of what should be done. SIP puts an end to all this by automating the process of investing regularly. It eliminates the mental load of deciding when to invest and leads to better returns.
At the time, I would lament the fact that while this simple psychological trick would keep you investing in downturns and thus boost your returns, too few investors were enrolled in any Systematic Investment Plan. However, during the past years, this has changed substantially. Indian mutual fund investors have moved substantially towards using SIPs and therefore not being swayed by the temporary ups and downs of the equity markets.
This is amply demonstrated by the September edition of the monthly investment data that is released by the Association of Mutual Funds of India (AMFI). Interestingly, the headline number on equity investments sounds like bad news: net inflows into equity and equity-linked funds fell 28 per cent from Rs 9,152 crore to Rs 6,609 crore. So why is that good news? Simply because the SIP inflows increased from Rs 8,231 crore to Rs 8,263 crore! That means that while the non-SIP investors behaved exactly like they used to in earlier times, SIP investors are an exception and continue investing in bad times or good. Non-SIP investors in aggregate pulled out money while SIP investors marched on unfazed and actually invested more!
Once upon a time, such behaviour would be impossible except in a tiny minority of knowledgeable investors, whereas now it's mainstream and of the same scale as the older, self-destructive kind of behaviour. The important thing is that this is a self-perpetuating and self-reinforcing phenomenon. The more investors switch to SIPs and stop trying to time the markets, the more they will themselves experience the superior returns and then invest even more in this manner. The amount of money that SIP investors save and invest productively is objectively higher than others because they don't stop and the good experience makes them increase their investments to as much as they possibly can.
There's an old saying about saving and investing that has been doing the rounds in different versions: It's not how much you earn, it's how much you save. It's not how much you save, it's how much you invest. It's not how much you invest, it's how well you invest. It's not how well you invest, it's for how long you invest. It's not just any of these, it's all of these.
In a way this perfectly captures why savers who take the SIP route are so successful in achieving their actual financial goals. If you invest a small amount of money and achieve great returns it does not matter. I mean you can brag about it on Twitter or Facebook but it doesn't move your life forward. Whereas starting SIPs, increasing their amount and going on for years helps you at each step in the above and actually gets you where you want to go.