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Should investors still invest via SIPs?

Dhirendra Kumar shares why SIPs are still the best way to invest in equity

There has been a belief associated with SIPs that if one stays invested over a long-time horizon through an SIP, then you can gain higher returns as compared to FDs and the rate of inflation. However, for some mutual funds, SIP returns of the past five-seven years have been disappointing. This is a matter of concern and there is a possibility that people may lose their confidence in SIPs in future.
- Navneet

Your question has your answer in it. There is a possibility that at times, SIP returns may not match the expectations and this is what is happening today. However, I still believe that SIPs should not be looked upon like this as they have several advantages.

Firstly, SIPs help you average your cost of purchase. Equity markets are highly volatile in nature and to make the most out of ups and downs of the markets, the best way is to enter through SIPs so that you buy both at highs and lows, averaging the cost of your investment. If you invest a lump sum, there is a chance that you may enter the market at a high.

Secondly, SIPs go well with your earning cycle, thereby helping you build a large corpus over time. An SIP can be considered as the EMI for the corpus you wish to build. Just like the EMI for a loan is deducted from your account every month once your salary gets credited, the SIP is also deducted from your account. The money which otherwise if left in your account, generally gets spent. But with the deduction of the SIP, you can first save and then spend what is left.

Coming to the fact that SIP returns over the past five-seven years have been disappointing. Today, the equity markets are not in a good condition because of the ongoing pandemic. The market crash has wiped off past returns of equities. However, I still believe that if you invest through an SIP for five-seven years, you will be able to beat the returns of fixed income. It is true that there has been a drop in equity returns as compared to the past. But even fixed-income returns have been dropped drastically, as the inflation and interest rates have decreased. Five-10 years ago, 15-18 per cent returns were considered to be good returns. However, today, based on the inflation and interest rates, 10-12 per cent returns are considered to be good enough. Hence, you need to reduce your return expectations based on the market and interest-rate scenario and continue investing through an SIP.

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