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There is A Way to Make SIPs Work in Tough Times

10-Jul-2020

The monthly SIP number has dipped below 8,000 crore for the first time in almost two years. Net inflows into actively managed equity funds also slid to a four-year low. Mint explains what is happening and why.

The monthly Systematic Investment Plan (SIP) number has dipped below 8,000 crore for the first time in almost two years. Net inflows into actively managed equity funds also slid to a four-year low. Mint explains what is happening and why.

Why has the monthly SIP flow dropped?

Monthly SIPs rose from 3,122 crore in April 2016 to over 8,000 crore in December 2018. They held above that level until June 2020 when profit booking in the post-covid-19 market coupled with layoffs and pay cuts in organized sector pushed them back down to 7,927 crore. An SIP involves investing a fixed amount each month in a mutual fund. The monthly format fits well with the salary that many investors receive and was popularized greatly by the #mutualfundsahihai campaign launched by the Association of Mutual Funds in India (Amfi). However, their flow is ultimately tied to market movements.

A sluggish economy and market over the past 2-3 years have pulled down SIP returns. The economy was weak even before the covid-19 outbreak hit. A 10-year SIP in a Nifty 50 Index Fund would have yielded 8.46% (CAGR). This has fallen to 5.75% over the past five years and just 1.31% over last three years. Long term investing is drilled into SIP investors, but there are limits to how long investors will accept low returns. Although SIPs in high performing funds would have given higher returns, actively managed funds on average have not been able to beat indices over the past 2-3 years, especially in the large cap space.

Can overvalued markets impact SIP performance?

When should one pause or stop SIP?

The pandemic has brought in a lot of uncertainty laid emphasis on the importance of having emergency money before any money moves to investments for other purposes. Accordingly, there are some reasons for pausing your SIP. The first is to create emergency corpus. The second is to take stock of your asset allocation and alter your SIPs accordingly. The third reason to pause can be the overvaluation of the market. However, experts note that the market is forward-looking with variables at play and rebound should not be a reason to stop SIPs.

What else can one do to reduce risk?

SIPs are a tool of risk reduction because they average out your purchase price. An equally important tool is diversification. This means you hold different asset classes such as debt, gold, and international equities, in addition to your SIPs in equity mutual funds. You also rebalance between the asset classes based on market conditions. For example, if the market has corrected, you can switch more money to equity SIPs. If the market is overvalued, you can shift more money to debt funds.

Source : Live Mint

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