Is mutual fund SIP an all-weather investment tool?

Recent data on systematic investment plans (SIPs) show monthly flows growing above $12,000 crores. Despite this steady increase in SIP flows, mutual funds (MFs) as an investment avenue have a long way to go, even if it is one of the best avenues to invest for all financial goals. In fact, many investors have not yet started their MF investment journey.

SIPs are critical when it comes to building a corpus over a period. Many people invest through SIP and increase the amount regularly. Due to their long-term nature, SIPs are more likely to go through different stock market phases multiple times.

When investing, there is a lot of discussion about how our behavior as investors is more important than our investments. When the stock markets are rising, everyone feels like they have a lot of control over their investments by looking at the rate of growth. However, the key is to have a similar discipline also in uncertain times.

As we look for the right MFs to invest in, we need to see how these funds have fared in good times and bad. How we behave during those times is equally important.

As we all know, the stock market fell by 38% on March 23, 2020 from its peak in January 2020 and remained volatile for some time. Many investors invested during these uncertain times and rightly so to take advantage of the market downturn. Most of these investments were in the form of a lump sum and it worked out well for them. However, some investors considered pausing or stopping their SIPs then and also recently when the stock market was volatile between January 2022 and June 2022. Such thoughts are natural. Seeing a rapid decline in portfolio returns can push investors to make that decision. However, this may not be the best thing to do.

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Let’s see three investment scenarios, in case we had a monthly SIP of $5,000 in a January 2019 Nifty Index Fund and how these investments would have performed (see chart). Here, the index fund is considered just as an example, you can build the mutual fund portfolio with the help of other diversified stock funds along with index funds.

During volatile times, many investors think the market could drop further and stop SIPs. However, there is a cost to such a reaction. Affects overall yields (see table). The growth rate of uninterrupted SIPs continues to deliver better results compared to those that are paused and restarted. Plus, it also helps to be on the right track from a goal-based investing perspective.

SIP is a powerful and reliable tool when it comes to investing through mutual funds, particularly for those who are building their portfolio to meet their goals, step by step. There are many merits to staying the course and staying grounded over time when investing through SIP. As we see, in all three scenarios, it is not how the stock market or the Index Fund behaved that resulted in different investment returns, it is how we reacted and managed our investment that made the difference.

Harshad Chetanwala is a Sebi Registered Investment Advisor and co-founder of MyWealthGrowth.

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