Keep It Simple

One of the worst things that the financial services industry does is to regularly take simple and effective idea and then complicate it beyond the point of usefulness. India’s mutual fund industry is currently busy doing this to SIPs. Fund companies have attached a whole host of bells and whistles to SIPs that investors should approach with a great deal of scepticism.

SIPs are supposed to be a simple and straightforward idea. You invest a fixed sum regularly in an equity fund, regardless of market conditions. Over a long-term, you end up buying more units when the markets are down and fewer when the markets are up. Your average price of acquisition is inevitably lower than what it would have been had you tried to time the market by trying to predict and anticipate its movements.

That’s the arithmetic of SIPs. But as I’ve often written, the value of an SIP is not just in the mechanics, but also in the psychology. Enhancing your returns is the simplest thing in the word when all you have to do is to choose a fund, decide on how much you want to invest and forget about it. In practice, the real value is in saving you from having to think about what’s happening in the market.

However, it seems that this is too simple and effective for mutual fund marketers, so they’ve decided to destroy this simplicity. There are suddenly a whole host of modified SIPs being offered by AMCs (and some distributors too), that add what is basically an element of market-timing to SIPs! To any sensible mutual fund investor, this idea would sound like a joke, but what can they do? I guess the need to differentiate a simple product is written in every marketing textbook, regardless of the fact that this is product where simplicity is the core attribute of the product.

Here’s a quick sampler of what is being offered. One AMC has started a system by which you can opt to invest aggressively in an SIP by enhancing your investing amount when the BSE Sensex’s PE falls below a certain range and by investing less when it falls above a certain range. Every month, the amount to be invested is decided based on the market’s level.

Another AMC asks you to specify a minimum and maximum for the monthly investment amount. The actual investment amount can be anywhere between these two levels depending on the level of the market. Another one is a complex system of triggers and pre-set levels. When the market trips one of the trigger levels by falling from a pre-set level by different amounts, then different amounts of investments can be made. Or something like that. A couple of AMCs have re-engineered the STP. Here, you invest in their bond fund and then depending on the valuation level of the market, differing amounts can be transferred to selected equity funds.

About the only sensible enhancement to the basic SIP I can find is the Top-Up option launched by one AMC. Under this, investors can start an SIP whereby the monthly amount gets ramped up periodically. Since most people’s incomes (hopefully) go up with time, it makes sense for the monthly SIP to go up regularly. Of course, you can do this at any time with any SIP.

As an investor, you should steer clear of all the complexity of these market-timing SIPs. They just complicate the decision-making process. I suspect part of the reason for launching these is that it could give a leg-up to otherwise mediocre funds. I mean, once a salesman convinces you that an AMC’s market timing algorithm is some great invention, you may be less inclined to pay attention to the track-record of the underlying fund. In reality, your interests would be best served by focusing only on choosing a good fund and ignoring everything else.