Unmasking the SIP Myth: A Realistic Guide to Long-Term Investing
· By DTC India Team
Education
If your someone who does SIP's just on basis of seeing influencers saying a monthly SIP of 20,000 a month will give you 10cr after 20 years, or someone who believes buy at any price works and does not understand its risks, or someone who does not understand what SIP really is then this blog is a productive & knowledgeable read.
Brief explanation of what SIP in layman words mean: SIP stands for Systematic Investment Plan. It is a method of investing in markets where you invest a fixed amount of money at regular intervals, such as monthly or quarterly, instead of investing a lump sum.
⭐ Now lets understand how SIP in India is being sold as a story and product rather than classifying it as a strategy!
- You might have heard a lot of times from TV business channels and even some fund managers/AMC managers say not to time the market and keep investing and running your SIP's without stop, keep doing your SIP's for long durations 10-20-30 years and have patience and trust on the markets. This comes with many disadvantages which people don't create investor awareness on.
- Doing SIP's for 10-20-30 years without having to do much research and invest through mutual funds might sound right, but your financial advisors, TV business channels, and your market analysts wont tell you that SIP's only work in a pro-longed uptrend markets, what I mean by pro-longed uptrend markets is markets like US - NASDAQ 100 & SPX 500 which has been in an uptrend for almost decades and decades.
- On the other hand markets like CHINA & JAPAN don't reward strategies like SIP's as pro-longed trends have been volatile in those markets, but one can ask Indian markets have also been in an uptrend for decades. Yes true, but the real problem lies on how these influencers, investment advisors and etc assume a certain return of 10-12% and project returns and potential gains after 10-20-30 years. No one can predict if market will stay the same in that long period of time, another issue with SIP's are your average buy price keeps increasing which could lead to lesser returns on your capital you invested or in worst cases negative returns if the starting price/valuation of SIP done is not reasonable.
- Due to the projections made and advices given, people assume SIP's will be rewarding in the very long term and the risk is less, but the truth is risk is always the same because its just another strategy to capture gains of the market, a person who implements SIP means the persons analysis/view is that the market will stay in a long term uptrend without much harsh volatility like CHINA AND JAPAN markets. Another thing these analysts, TV channels, investment managers tell you is SIP does not require much knowledge, time, and dedication.
- Another thing these analysts, TV channels, investment managers tell you is SIP does not require much knowledge, time, and dedication. Let me tell you SIP's in mutual funds might not need any of those, but basic knowledge, time, dedication are required to understand what your executing your hard earned money on. You will need to put in some time to understand how things work in any field of work/business, there is no such thing as easy money in life and stock markets. You need to understand the basics of each and everything you put your money on.
⭐ So far we have discussed the normal way of people getting lured into SIP's without understanding how the strategy actually works and its risks . Now we will discuss how the strategy can be implemented in a better way.
- SIP's started in a good bear market or even better, a market crash will have better margin of safety as prices in bear market or in crash are very reasonable which takes off the downside risk and sudden gain to loss PNL movement. Basically the risk of you losing your gains or making losses is lower because you are buying an asset at a reasonable valuation or even undervaluation, don't forget the statement above where we discussed SIP' strategy only works in pro-longed uptrend markets.
- SIP's paused after markets being too extended/not reasonable in terms of valuations can help you save money for the next correction to invest and get a better price. One will say this means your trying to time the market, Yes you are to some extent timing the market by looking at valuations but please note that its better to not invest when markets are not reasonably priced than believing in the story of 10-20-30 years projected gains and returns. Usually in pro-longed uptrend markets you will see a lot overvalued/unreasonable valuation periods where the risk is higher than the reward and margin of safety is very low.
- If the market is extended for sometime you can calculate the number of months or quarters since the pause of SIP and re-invest that amount in the next correction where you find the valuation to be reasonable. You can either re-invest that entire amount in 1 go or you can invest in tranches of that amount as no-one can predict the exact bottom of a correction or fall in the market.
- Consider doing SIP in good mutual funds only where valuation is more prioritized than momentum, because in the long term the margin of safety is higher in value-based method mutual funds but again this depends on your risk appetite which your own personal call. Suggestion would be to avoid doing SIP's in thematic mutual funds and mostly consider FLEXI CAPS, INDEX FUNDS, LARGE and MIDCAP funds.
- Starting SIP's are easy but to do them consistently is hard, do not stop SIP's just because you got impatient, or the returns are less in the starting years because its the nature of the strategy to be patient and keep executing.
https://www.tradingview.com/x/ABkMBElj/
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https://www.tradingview.com/x/zLc190vb/
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The chart links of NIFTY 50, SPX500, HANG SANG AND NIKKEI 225 posted above for reference which we discussed above.
Whatever the strategy maybe, understand its nature, pros and cons, where it works, how it works, and why it works, understand the logic behind it basically. Do not blindly follow anyone's advices like discussed above.
"Price is what you pay, value is what you get" - Warren Buffet
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price - Warren Buffet
The Function Of The MARGIN OF SAFETY Is , In Essence, That Of Rendering Unnecessary An Accurate Estimate Of The Future - Benjamin Graham