Should SIPs tail the market?

SIPs were created to enable disciplined savings and moderate regret

If you are investing in equity mutual funds through the systematic investment plan (SIP), you may have a cause for concern. For you would invest even when the market continually climbs up, as it has in recent times.

Should you stop your SIPs when you believe stocks are pricey? In this article, we show that setting-up market-tailing SIPs is not easy. So, for a lack of a better alternative, you should continue with your SIPs, unless the fear of loss is causing you to lose sleep!

Why SIPs?

If you do not set up a SIP on your equity investment, you may have to manually invest each month. You may not be disciplined or may not want to take an active decision each month.You could invest in the same fund each month. Yet, you will be forced to take an active decision — which day of the month to invest? What if the market declines immediately after you invest?

SIP helps you distance yourself from your investment decision. You set up an automatic debit from your bank account. That means you do not have to take an active decision and your regret will be lower. Of course, there is also the advantage of disciplined savings; an auto debit ensures that you forcefully save every month.

But there is a flip side to SIPs. At least, according to some financial experts. You invest a fixed sum of money every month through the time horizon for your life goal. Suppose you want to buy a house six years from now. You would set up your a monthly SIP for six years. This means you would be able to buy more units when the market declines and lesser units when the market climbs up. But you would continue to invest the same amount even if the market valuations are stretched. So, SIPs do not dynamically adjust your investment amount to market conditions or do not tail the market.

Market-tailing SIPs?

You could set up SIPs that adjust to market conditions. So, you would invest more when the market declines and vice-versa. Suffice it to say that the amount will be adjusted based on your required return to achieve a life goal against the actual return on the SIP.

For instance, if based on your expected return, the accumulated amount in your equity fund at the beginning of, say, November should be ₹80,575. But the actual amount is ₹82,900. Suppose you invest ₹5,000 every month. Your investment account should have ₹85,575 (80,575 + 5,000) after the investment in November. But it already holds ₹82,900. So, you have to invest only ₹2,675 in November. You would likewise have to invest more when the actual return is lower than the expected return. The issue with mark-tailing SIPs is that you have to calculate the amount each month. Would you be able to do that till the end of the investment horizon for each of your life goals? Even if mutual fund companies automate the process, the amount will vary. When you are saving to achieve a life goal, investing the same amount is less stressful.

The experts may be right. SIPs may be flawed in that they do not tail the market. But SIPs were not created for that purpose. They were meant to enable disciplined savings. In the process, SIPs moderate investment regret. The trade-off: You may have to invest the same amount in all market conditions!

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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