investment advice: SIP with caution, says top fund manager, causes a stir in industry

S Naren’s no-holds-barred speech at a recent mutual fund distributor event in Chennai has caused a stir in the asset management industry and associated circles. The chief investment officer of ICICI Prudential Mutual, in the presence of an army of top investment advisors and distributors, underscored the risks of investing in expensive stocks even in a staggered fashion, among other issues, in a rare instance of an experienced industry insider spelling out the trigger warning explicitly. His speech was pulled out subsequently; some said it was because of a lack of the company’s compliance approval, while others speculated the influential distributor lobby did not want it to come out. Nonetheless, the remarks have set the cat among the pigeons.According to Naren, if an investor puts money into the wrong product through the popular Systematic Investment Plan (SIP) at the wrong time, it means trouble. He was alluding to the continued flows into equity schemes that bet on small-cap and mid-cap stocks – considered expensive even after the recent sell-off. Naren highlighted a few periods when SIPs as an investment plan would have lost money for investors. These included phases like 1994-2002 and 2006-2013 when SIPs in mid-caps would not have yielded any returns; on the contrary, the investment strategy eroded investor money.

The word of caution is noteworthy as it’s coming from a stakeholder. It is also significant because few in the tightly-knit powerful triumvirate of mutual funds, distributors and personal finance experts have warned investors of the pitfalls of wrongly directed SIPs. Those who believed so have kept mum fearing a backlash.

In the past decade or so, investors in equity mutual funds have nothing to complain about; in fact, it has been a dream run with investments compounding between 15-20% on average. Many first-time investors have been onboarded against this rosy backdrop and tacit guarantee of at least 12% returns. Unfortunately, the stock market decline in the past five months – the longest since 2018-19 – has resulted in investors losing money on SIPs done in the past year.

SIP, or rupee cost averaging, as a concept is a sound strategy to put money into riskier assets like equities. It originated as a method to mop up beaten-down stocks or themes. Subsequently, the mutual fund industry smartly owned it up and projected it as an all-weather route of putting money into equity schemes. The deluge of data suggesting that investors must ignore rich valuations in the near term and continue to invest for five or 10 years through SIPs emanated from this narrative. This partly explains the continued flood of investor money in the past two years into thematic, sector, and mid-cap and small-cap schemes despite being at their peak levels. Money continues to flow into the mid-cap and small-cap schemes, and it is clear investors have not been warned enough of the pitfalls of putting money in red-hot share categories. Mutual funds are also guilty of launching equity schemes betting on popular themes at the peak of the bull market to bolster their assets under management and to reward distributors. While foreigners and promoters have dumped expensive Indian stocks in the past many months, mutual funds, armed with a flood of retail money, have soaked up the supply of shares, often portrayed as a sign of strength and maturity by individual investors and the market.

History has shown equities deliver superlative returns over longer periods but that cannot be a reason to buy them by being indifferent to their levels and valuations. If the value of an equity mutual fund dips by 20% in a market sell-off, the fund must make 25% gains to recover that 20% loss. Several individual investors could find it tough to stomach such volatility and uncertainty in returns. Investors in various small-cap and mid-cap schemes are staring at such a situation at the moment. According to Naren, the outlook for SIPs in such schemes looks unfavourable unless done for 20 years, which is a rarity. Currently, he recommends SIPs in large-cap, flexi-cap schemes or equity-oriented hybrid products.While some peers in private dismiss Naren’s remarks as fear-mongering, it might be foolhardy to reject his views in totality. The fact remains that several fund managers today have not seen a bear phase or are yet to face a prolonged period of redemptions. A lengthy bear market may not be in the offing but experienced fund managers like Naren prefer to err on the side of caution as they carry the burden of having seen multiple market cycles.