Systematic Investment Plans (SIPs): ET In The Classroom: SIPs in choppy markets

Systematic Investment Plans (SIPs) are a popular way to invest in equity mutual fund schemes, with monthly collections touching Rs 26,000 crore. However, as SIP returns from equity funds have slipped into the red for the last year, retail investors with a long-term horizon and well-defined asset allocation and goals should not stop their allocations as a knee-jerk reaction.

WHY ARE SIP RETURNS FOR THE LAST ONE YEAR IN THE RED?
The value of the units accumulated through the SIP mode of investment over the last one year has fallen due to a sharp fall in the equity markets in the last few weeks. As a result, the net asset value (NAV) of the schemes fell, which has led to a drop in value for investors. The fall has been higher for riskier schemes like small-cap, midcap and some narrow thematic funds, compared to large-cap funds.

SHOULD THIS WORRY INVESTORS? WHAT SHOULD THEY DO NOW?
SIPs help in rupee cost averaging. This method of investing lets you buy a higher number of units when the market is down, thereby averaging your investments. A fall in equity markets should not worry long-term investors using SIP to meet their goals.

Typically, if you have staggered your equity SIPs to a long-term goal, assumed a reasonable return of 10- 12%, and the monthly investments are in line with asset allocation, risk tolerance and needs, they should not be disturbed by this volatility. There is no reason to stop SIPs due to this fall. However, investors who have blindly started SIPs in mid-cap and small-cap funds without asset allocation or risk tolerance and are merely chasing high returns might need to relook and balance their equity portfolios.

WHAT SHOULD INVESTORS FACTOR IN WHILE STARTING A SIP?
Wealth managers believe investors should consider their time horizon, risk tolerance and existing portfolio before starting a SIP. Equity investments are for the long term with a minimum time frame of five years to go through the entire cycle of ups and downs.

If they cannot tolerate volatility, they should invest in a large cap-oriented equity fund or hybrid fund. Those opting for mid-cap and smallcap SIPs should be ready to take higher volatility, risks and intermittent drawdowns.

Mid-cap and small-cap equity SIPs should form only a small part of their overall equity portfolio and should not exceed 25-40%.