Why SIPs?

“Mutual fund SIP crosses Rs 19,000 crore-milestone for first time in February”

This comprises 8.20 crore SIP accounts with 49.79 lakhs new SIP registrations.

This simply means - that over the next 2 years, approximately Rs. 4.50 lakh crores will be added to the Mutual Fund pool - i.e. approximately 15% of equity mutual fund AUM which is approximately Rs. 30 lakh crore.

But why is that?

The most important question many of the investors wonder is why so many people are flocking to equity mutual funds via the SIP route.

The answer lies in the last 4 years.

Any investors have four assets to invest in:

• Real Estate

• Fixed Deposit

• Equity

• Gold

Upto 2012, many and most of the investors have invested sizeably in real estate. This was mainly because their prior investments in real estate did very well. People who invested in real estate in the 1990s, and 2000s appreciated multiple times, and hence they kept on investing back in real estate - the power of recency bias. We always tend to invest in assets that give us the best returns.

Till 2019, the monthly SIP investment was approximately Rs. 8,000 crores. That was years and decades of people slowly investing in equity with successful campaigns such as “Mutual Fund Sahi Hai”. From Rs. 8,000 crore to Rs. 19,000 crore, SIP is now coming in big numbers - people are committing even Rs. 50 lakhs via monthly SIP.

This was because - people saw a phenomenal thing - their investment dipped almost 35% during COVID-19 but jumped back up more than that in a subsequent year. To add to it, people who needed money could quickly get out of the market, and when they had a surplus, they could quickly deploy.

Post 2020, the stock market in India caught wind of its own. People were left with huge surplus cashflows and they started investing in their newfound love i.e. “SIP”.

This showed them that “Dip in the equity market is temporary” and hence we are seeing a sudden 10-15% dip in the market but quickly going back up. The power of recency bias kicks in - and people keep investing.

When will this become an issue?

When SIP numbers add at least Rs. 5,000 crores on a monthly basis - that would form a bubble. “Bubble” always forms when people blindly flock to an instrument without realising the downside.

The beauty of SIP is that it helps you take advantage of two powerful concepts: rupee cost averaging and compounding.

Rupee cost averaging means that you buy more units when the market is low and fewer units when the market is high. This reduces your average cost per unit and helps you earn higher returns in the long run.

Compounding means that your returns are reinvested to generate more returns. This creates a snowball effect and helps your wealth grow exponentially over time.

Here is an infographic that shows how SIP works vis-a-vis other options and how it can help you become a crorepati in 15 years:

Your time horizon is how long you want to stay invested in a scheme. In general, the longer the time horizon, the lower the impact of market fluctuations.

You can also choose from different categories of schemes within each type based on their size (large cap/mid cap/small cap), style (value/growth), theme (sectoral/thematic), or strategy (index/active).

As a guide, we show the path of sustained investment in mutual funds and how that creates wealth. If you know someone who should build a corpus for their future, I would like to connect with them. Just drop me an email at [email protected] and I will guide them through the process.

Let’s spread financial awareness.

Happy investing!

Tejas