The Mutual Fund Show: The Dos And Don’ts Of SIPs
Systematic investment plans are considered one of the best ways to invest in equity mutual funds. But investors should be aware that “an SIP is not a fixed deposit—it’s not going to be risk free”.
That’s the word coming in from Radhika Gupta, chief executive officer at Edelweiss Mutual Fund. “Sometimes investors believe that an SIP is the answer to everything,” Gupta said in BloombergQuint’s weekly series The Mutual Fund Show. But investors must have realistic expectations and an understanding of what could go wrong, she said.
While SIPs can’t completely mitigate the risk of markets falling, having clear goals in mind helps, said Harshad Patwardhan, the chief investment officer for equities at the fund. If investors achieve their financial goal ahead of schedule, they should “seriously consider” booking part of the profits, he said.
Gupta said one of the main benefits of investing through an SIP is rupee cost averaging. The benefits of rupee cost averaging—helps investors buy more units when the market is low and vice versa, lowering the average cost per unit—can recede considerably with an increase in the investment corpus. By increasing the SIP amount in tandem with the growth in corpus, investors can ensure that averaging is done effectively, she said.
Watch the full episode here:
Here are the edited excerpts of the conversation:
What impact will the IL&FS bond exposure have on mutual fund schemes?
Radhika Gupta: Every mutual fund in this kind of scenario will take a very specific view and no one would want to judge whether that view is right or wrong. An investor should be well informed. He should talk to his adviser and the AMC in which he holds the fund. AMCs will do whatever it takes to reach out as to what their plan is vis-à-vis how to value the particular security.
Your course of action depends on a lot of factors like what fund you are invested in, what percentage is that downgraded security in that fund, what time horizon there is, what tax implication there is.
The second thing an investor should do is not panic in any kind of credit downgrade event. Remember that it is part of your portfolio. It is not all of your portfolio. When you see 20-50 percent mark down, remember it is on a security which is part of your portfolio and not 100 percent of your portfolio. It might be 1 percent of your portfolio in which case the panic might be absolutely unnecessary.
If I have an investment in a fund where they have exposure and mark down has happened. Does that mean that my net asset value will forever be a factor of that mark down value or could there be some level of recovery?
Gupta: You have Rs 100 and Rs 10 is mark down security. It was marked down by 25 percent. You are at Rs 7.5. So, your NAV at the fund level has fallen by 2.5, assuming nothing else has changed. Whether it will come back or not, it is difficult to guess. If there is a default, then there is nothing will come back immediately. There may be eventual recovery one or two years later in which you will get your money back. A downgrade is not a default. A downgrade is just a lower rating of the instrument from AAA to AA in which case the rating could change if the company’s borrowing profile improves.
How should investors with SIPs prepare for inflation?
Gupta: All investing should be done towards a goal. SIP by nature of its long duration should have some goal. If you are saving for college education abroad, then Rs 10,000 a month will accumulate a certain corpus, may be a crore. Will that crore be enough to pay for a college education 10 years later adjusted for inflation and currency depreciation? We tell people to look at inflation adjusted SIP amount. We give people inflation adjusted SIP calculator. When you think of SIP, also link it towards your goals and make sure your goals take into account of what will be the reality in 2030 and not 2020 when you are doing it.
If there is an assumption that the market falls, which means that there are volatile times ahead, how does one mitigate that risk?
Harshad Patwardhan: If the market falls, the NAV drops, you cannot mitigate that risk at all. If you invest for 5-10 year horizon, then time to time markets will fall. If you look at behaviour of the equity market over history, we have seen that it has delivered very good returns and SIP would have delivered better returns. The whole assumption in SIP is that eventually the market is trending up which is why you make money by buying low.
So, while you can’t completely mitigate the risk of markets falling, if you have a goal in mind it helps. You put the money out for 15 years and in 10 years your financial goal is achieved. At that point of time, you should seriously consider whether you should book part of the profits because ultimately you are investing towards a goal.
If I end an SIP or if I want to stop an SIP for the time being, what should I do? Would it be prudent to end an SIP and invest in liquid funds?
Gupta: The purpose to do an SIP is to do avoid market timing. When you are exiting the market, you can also do it in a systematic way. There is an SWP (systematic withdrawal plan) just like an SIP. Once you have exited an SIP, the point is not to move back into a bank account, the point is to continue investing. Keep it in liquid funds, keep the regular habit of savings going or find another product that suits your risk profile and is a little more conservative. Don’t stop the habit of saving.
Patwardhan: One solution is for investors to keep an SIP at a level which he is comfortable with and from time to time if the market falls, he can take away because his SIP amount is something that he cannot afford but at different points of time, he can decide whether I want to put a lump sum when the market is down or when the market does a lot better, whether to take that part out and keep that SIP running at a lower level so that it does not really pinch him.
Before people start an SIP in non-equity funds, they don’t have an idea whether a short-term debt fund versus something else which is in the fixed income category is a better option versus something else if my time horizon exceeds one year. What would you advise people to do in such situations?
Gupta: An SIP is normally meant for equity funds because it is goal-oriented and it is long term. If you are investing over one year, you should not be investing in equity funds, not even hybrid funds, you should be investing in fixed income. The only reason for people do to an SIP in fixed income funds is that it keeps you in a monthly habit of saving.
Anything else that you believe that people ignore while they are investing in an SIP or lump sum investments?
Patwardhan: Understanding the fund that you are investing in is very important. Analysing the style of the fund manager, looking at history and whether the mandate is taken seriously or not. Liquidity analysis of the fund portfolio is also very important.