The secret sauce of SIPs

Today SIPs don't require an introduction. They have become a powerful tool to invest in equity. In August 2018, the monthly SIP flows crossed Rs 7,500 crore. What has caused this rise in popularity of SIPs?

The beauty and appeal of SIPs lies in their straightforwardness. You invest a fixed sum regularly in an equity fund, regardless of market conditions. In the long term, you benefit not just from compounding but also rupee-cost averaging - you end up buying more units when markets are down and fewer when markets are up. Thus, 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.

To get the best out of your SIP, you need to keep it simple with an investment frequency that you can easily maintain and manage depending on your income. It's a misconception that frequency of your SIPs determines your returns. It's not just the frequency of SIPs that's the concern. There are now many 'types' of SIP available from Indian mutual funds. They allow you to time your SIPs as per the market conditions. For instance, one type of SIP increases your investment when the market declines and cuts it when the market rises. Though that may seem to be a 'brilliant' idea, given that you are increasing your investment in a bear market, that's not the case. Many investors will have difficulty in scaling up their investments as they see a falling market. Also, you may not have additional surplus when the market starts to fall. So, what look likes a good idea is difficult to implement. Same goes for other 'innovative' SIP types. The bottom line is clear: keep your SIPs simple. The classic version SIPs - monthly SIP done in a disciplined manner - remains the best choice for most of us.

There is a bigger reason to invest through an SIP and that reason lies in investor psyche. SIPs are 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 thus often missing out on the best opportunities. When markets turn discouraging, the general instinct of many investors is to stop investing, either because they are scared or because they are trying to catch the bottom. In a rising market, the natural tendency is to invest more so that you can make most out of the bull run while it's still on. As any experienced investor will tell you, this eventually fires back. SIPs help you get rid of both these behaviours.

Finally, SIPs are not some magical tool that guarantees superior returns. The choice the fund is as much crucial. You can't make good returns if you are doing SIPs in an underperformer.