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The newbie

New mutual fund investors were taken aback by the crash in March, which turned their SIP returns negative. Here is how they can stay the course

The newbie

Naveen Mittal, a sales manager at a renowned electronics retail outlet, has been working for close to six years since getting out of college and has been investing only in traditional debt-based instruments. However, in 2017, he was assigned a wealth manager, B K Moorthy, at the bank to help him get started with equity-based instruments offered by the bank.

Moorthy made a nice presentation to Naveen, showing how investing through SIPs in equity can help him earn double-digit returns of over 12-14 per cent. Naveen was convinced. He was already quite influenced by the 'Mutual Funds Sahi Hai' ad campaign that had been going on in media.

Naveen is one of the many who have joined the mutual fund bandwagon in recent years. As per the SEBI's chairman's address at the 25th annual general meeting of AMFI, the Indian mutual fund industry has more than doubled the number of folios from 4.16 crore in March 2015 to 9.26 crore in August 2020, growth of about 15-16 per cent on an annualised basis. Not just this, we have also seen a net positive inflow of Rs 1.89 lakh crore annually over the last five financial years and it is already Rs 1.99 lakh crore within just five months of this financial year. This gives you a glimpse of not just the rate at which people have taken to mutual fund investing in recent years but also the magnitude of money that they have invested.

However, over the past year, especially after the March mayhem, the returns for investors like Naveen haven't been inspiring and dropped to low single digits. In contrast, Lucky Singh, one of Naveen's new reporting sales associate, has earned about 20-25 per cent absolute returns within a short span of four-five months on the lump-sum investment he had made during the crash.

Obviously, Naveen feels disappointed because of the relatively poor performance of his SIPs over many years of disciplined investing. The high returns that his colleague has earned through a lump-sum investment has further increased Naveen's doubt about SIPs.

What to do?
New investors must revisit the logic of SIPs. Most of us get our incomes on a monthly basis. SIPs are a convenient way to convert small cash flows into a large corpus. Thus, through SIPs, investments made every month can translate into a large corpus over time. Secondly, you also get to average your investment cost with SIPs as you will be investing across all market phases. This not only brings discipline to investing but also obviates taking a call on market direction.

While it's true that if you had made a lump-sum investment in March, you would have made handsome gains, do understand that that's only possible with the benefit of hindsight. No one knows when the market may crash. Waiting for a crash may result in staying out of the market for a long time, which can hamper your returns. Moreover, even during a crash, you won't feel confident enough to invest as there is always a chance that the market will fall further.

The antidote to market anxiety is SIPs. You don't worry about market movements but keep investing across all phases. Over time, your returns are automatically adjusted for market volatility.