SIPs are about simplicity

In most products, features are generally thought to be a good thing. Whether it's cars or mobile phones or vacations or houses, the more the features the better the product is supposed to be. However, when it comes to financial products meant for savers and investors, this passion for features is a problem, since features tend to obscure the inherent attributes of a product. Worse, when the disease of featuritis afflicts financial concepts like mutual fund SIPs (Systematic Investment Plans), whose very reason for existence is to provide simplicity, then the problem becomes very serious.

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It's very easy to get involved in over-complex analysis and lose sight of what is actually important. Consider an email I got a few weeks ago from an investor. This person wrote that he had read in an article somewhere that if you increase your monthly SIP amount by 10 per cent every year, then the final value would increase by 45 per cent. The investor wanted to know if this was true and if it was, then whether this 10 per cent increase should be a simple increase or a compounded one. I didn't quite know how to respond.

At one level, it's good to see that an investor is taking his investments seriously and is minutely examining what he is doing, and what effect it is producing. However, at another level, there's a problem because there's a touch of ritualism in what is going on here. Someone is applying the math slavishly, without understanding what is going on. Settling the answer to this question is a fairly straightforward arithmetic exercise, although the idea is dubious even without running any numbers. But even though the math is not quite there, what the original article seems to be trying to convince readers of, is that basically, if you invest more, you will end up with more money. One can hardly argue with that, even if it is not some magical number produced by an investment ritual.

However, the bigger problem is the idea that there is some magic to the very simple concept of investing in a volatile asset by averaging your cost. The idea of an SIP is essentially that you keep investing a fixed sum regularly in an equity fund, regardless of market conditions. Over the long term, you end up buying more units when the markets are down, and fewer when the markets are up. Thus your average purchase price is much likelier to be less than what it would have been otherwise. Therefore, when the time comes to redeem your investments, they are very likely to be worth more than what they would have been. That's all there is to it. There are no guarantees, and there are certainly no fixed formulae of expected returns. Hypothetically, if the stock markets were to go into a general long-term stagnation or decline, then it won't work out. But in the real world, since you are investing in something that has a high volatility but a general upward trend, you'll come out well.

However, the value of an SIP is not in the maths, but the psychology. It's the simplest way of investing regularly and getting good returns from equity without having to worry about when to invest and when not to invest, and in doing so often missing out on the best opportunities. Of course, mutual fund markers have exploited the attraction that complex, feature-laden investment options have for investors. There are a number of SIP plans to which market-timing has been added as a feature. There are AMCs and advisors who'll raise or lower your SIP amount based on index levels or PEs or such tricks. This is ironic because avoiding market timing is the whole point of doing an SIP.

If there's one investment technique where keeping it simple and avoiding every complexity is of the highest value, it's SIPs. In other words, keep calm and keep investing.

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