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The systematic investment plan (SIP) has since long been promoted as a superior investing tool for retail investors. While on one hand it instils discipline, on the other it protects investors from entry at a wrong point in the usually volatile equity markets.
The wisdom behind this investment tool has several facets, and not mere performance. But this concept has been sold so far merely on the premise of numbers.
This seems to have contributed to the fall in the number of new SIP accounts added by the mutual fund industry.
Fall in new SIP accounts
The rate of addition of new SIP accounts in the industry peaked at around 2.5 lakh in July last year. That has since steadily declined by more than 50 per cent to 1.25 lakh in March.
More worrisome is that many SIP investors have discontinued their accounts.
The net addition of new SIP accounts in the industry has, therefore, turned negative month over month. As a result, the total number of active SIP accounts for the industry fell from 46 lakh to 43 lakh during the financial year 2012.
The fall in SIP accounts is not only counter-intuitive, but also self-defeating for investors. In subdued markets, investors should be advised to increase allocation to equity for cost averaging.
The asset management companies have propagated virtues of investing systematically and so have the advisors. If all the stakeholders agree, there should have been no reason for a slowdown in the SIP numbers at the industry level.
The relevant question that we must ask therefore is that what is the basic premise for offering SIP to investors.
Is it merely for performance? For cost averaging? For investing discipline?
more encompassing
The proposition for SIP has to be more encompassing. Historical performance is important, but that is not the only consideration.
It is critical to articulate the discipline and cost-averaging aspects. At low market levels, a lower cost of acquisition pulls the average down thereby making the overall approach successful. It hence makes eminent sense to enhanceinvestments through SIP under market conditions such as the present one.
The next important step is to link SIPs to financial goals and target values rather than market levels. A financial plan will be the guiding tool for allocation.
SIPs will play a crucial role in linking financial goals to personal circumstances. SIPs then will not be a mere tool for investing over some years, but a lifelong habit.
It will not be an exaggeration to say that penetration of mutual funds is in many ways linked to the success and acceptance of the concept of SIP in India. As long as the product and the asset manager have been selected diligently, it is discipline and patience that will make all the difference.
(The author is Managing Director and CEO, ICICI Prudential AMC).
Queries may be e-mailed to >mf@thehindu.co.in .
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