- Date : 19/07/2020
- Read: 10 mins
- Read in हिंदी: क्या आप एस.आई.पी. से मंदी को हरा सकते हैं
Yes, mutual funds sahi hai… just don’t be blind to the associated risks.
Have you seen the recent TV advertisement from the Association of Mutual Funds in India (AMFI) featuring Sachin Tendulkar? The ad moves away from AMFI’s regular message of mutual funds sahi hai (mutual fund is the right way) and instead implies that mutual funds can be risky!
The commercial begins with Tendulkar handing over a helmet to a youngster at the nets, the underlying message being: safety first. When the kid’s worried mother approaches India’s cricketing hero, wondering if her son could get hurt by a quick delivery, he says there’s always a risk when batting, but assures her that her son is prepared.
Tendulkar then draws a parallel with finance, saying that irrespective of whether it’s mutual fund investments or cricket, there will be some amount of risk involved. At that point the boy plays a fast delivery with confidence, the mother looks reassured, and we learn that it pays to be ready for risks – even the type of risks that accompany mutual funds.
Why is the AMFI suddenly trying to spread awareness of mutual funds and risks, when it had for years been chanting mutual funds sahi hai? What changed?
Related: Myths about SIPs you shouldn’t believe
Markets take a hit
It’s investor outlook to mutual funds that has changed. The New Year saw the deadly novel coronavirus add to the chaos in a market struggling to ride out a prolonged slowdown. The result: India’s headline index, the Sensex, plunged some 32 percent between mid-February and mid-March.
Research by ET Wealth found this fall to be more rapid than the ones earlier – be it after the dotcom bust of the early noughties (2002-2004), the global meltdown after the 2008 US subprime crisis, or even earlier following the Harshad Mehta scam. In all such cases, the falls were gradual and stretched over several months. But this time around, the plunge was too deep, too quick.
But it was not only the Sensex that took a nosedive; global indices in the US, Europe, Asia, and many emerging economies plummeted too. Indian investors were rattled: would not the ripples of a global recession reach here? Investors, it seemed, also tended to forget that markets can, and will, fluctuate.
Equally suddenly, it seemed, they started looking at mutual funds with disbelief; that darling of theirs was no longer the safe bet they thought it was.
Related: Should you stick to the old tax regime or move to the new one?
AUM goes into free-fall
It was panic time with people pulling out of mutual funds. Trends in the Indian markets since February pointed to that. As per AMFI data, inflow and outflow for assets under management (AUM) fell from Rs 27.22 lakh crore in February to to Rs 22.26 lakh crore in March – a drop of 18 percent.
Analysts say this decline in the portfolio value – reflecting the sharpest monthly fall in AUM in FY 2019-20 – was primarily because investors pulled out their money fearing a market crash brewing.
This is where an understanding of what SIP offers – and does not offer – can help.
Advertisements from the happy pre-coronavirus days gave the impression mutual funds are an easy way to make money. But as the Tendulkar ad underscored, it is a fallacy to think mutual funds are risk-free. In fact, risk accumulation is a common issue with them, and SIP is not an assurance of higher returns at lower risk.
Consequently, alarmed new investors may be tempted to discontinue their SIP, without realising that what reduces risks are a longer SIP run, and whether the mutual fund is invested in quality stocks.
Related: Savvy millennials betting big on mutual funds
SIPs and exit blues
The advisable way to deal with a downturn is not by exiting your SIP when the market is unfavourable, but by being one step ahead through rebalancing your mutual fund portfolios at intervals. Ideally, you should plan your SIP investments – even when rebalancing – based on your goals and not as a knee-jerk reaction to how the markets are performing.
A Value Research study in 2017 on SIP performance for diversified equity funds over 25 years revealed the downside of discontinuing SIP: the shorter the SIP period, the higher is the probability of loss.
The following table illustrates how the loss probability rose with falling SIP period over the years researched:
| SIP Period | Loss Probability |
|---|---|
| 10 years | 0.30% |
| 5 years | 3.30% |
| 2 years | 16.20% |
| 1 year | 22.50% |
Related: Step-by-step process to starting a SIP
The message is clear: the longer you stay invested in a SIP, the more likely you are to book profits. The study, however, also made a crucial discovery: bad funds invariably let down investors, even with SIPs. If you are invested in an underperforming fund, stretching the SIP does not help. This is why it’s important to balance one’s portfolio.
Looking at it long-term
As the research findings showed, with SIP it pays to have a long-term horizon of about 10 years, maybe more. But why do long-term SIPs yield better returns? Well, this is because bear markets in India seldom go beyond 12–24 months at a stretch. In the third year, the markets begin to bottom out, and in the fourth, the next bull phase starts. By the tenth year, the SIP is well into the black.
This has been the trend in India in the past, and the trick is to not panic. Instead, wait out the bear phase. But even during a sluggish period – like the one we are seeing currently – the best SIP plans are long-term. This is because in a falling market, if you continue with a SIP, you will be basically buying more units for the same amount of money. As a result, over a period, your average investment cost will come down.
However, if you stop your SIP midway, you don’t average out your investment costs, and you defeat its very purpose of meeting your long-term goals.
Related: How to make changes to your SIP instructions
Steady does it
This may sound like timing the market, but it is not. To ‘time the market’ is to deliberately adopt a strategy of buying and selling stocks on the expectation that the price of the stocks concerned will go up or down, based on which corresponding investments are made to make a profit.
Most times, it does not work as ‘buy low now to sell high later’ is a strategy based on assumptions of hypothetical situations. Occasionally, people may get things right by timing the market, but making profits from this strategy on a consistent basis remains elusive to most who try this.
On the other hand, a SIP investment, or sticking to it during a downturn, involves disciplined investing based on long-term goals and research, taking micro- and macro-economic developments into consideration.
There is no assumption involved; any future stock performance a mutual fund is invested in is based on studying up on the company, its stock price movement over several years, and its balance sheet and cash flow statements. Investors also use a SIP calculator to check probable returns on small investments at regular intervals.
Top picks
Most investors find it difficult to choose a mutual fund to invest in, especially if they are new to the markets. Ideally, they should seek the advice of professional financial advisors while investing. However, it also pays to have a template by means of which they can choose funds that are right for them.
One way they can approach this is to evaluate four areas to assess a particular fund; these being the fund’s performance, associated risks, portfolio quality, and management of the fund. Let us briefly consider each of these benchmarks:
- Performance: The fund’s performance must be compared and evaluated against a similar fund.
- Risk: As stated earlier, mutual funds are not without their share of risks. You can base your risk measurement on the fund performance.
- Portfolio: You should look at the type of stocks the fund is invested in; study up on the performance of those companies, and the sector they are in.
- Management: When you like a fund and invest in it, it must because of its track record. What you need to check is whether the fund manager behind that fund's track record is still working for that fund.
In a February 2020 report, Value Research mentioned its top five fund picks for the current year (see table below):
| Fund Name | Fund Type | AUM (Rs Cr) | 3-year returns | 5-year returns |
|---|---|---|---|---|
| Axis Bluechip | Large-cap | 11,077 | 20.32% | 12.06% |
| Axis Small-Cap | Small-cap | 2,084 | 16.31% | 13.81% |
| Motilal Oswal | Mid-cap | 1,986 | 9.34% | 9.77% |
| DSP Tax Saver | ELSS | 6,260 | 11.60% | 11.60% |
| SBI Magnum | Thematic | 3,748 | 10.53% | 7.37% |
Source: Value Research
Related: Large-caps or mid-caps? Tackling the slowdown conundrum
As we just saw, SIPs are designed to take advantage of the different kinds of market conditions; this helps the various stages of ups and downs to deliver the potential returns over the long term. So, if you have done your research and taken a long-term outlook of your SIP, do not discontinue your SIP investments. Weather through the current conditions and behave as if nothing’s happened. You only stand to gain.
Here are some investment tips to prevent the falling GDP from affecting you.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.
Have you seen the recent TV advertisement from the Association of Mutual Funds in India (AMFI) featuring Sachin Tendulkar? The ad moves away from AMFI’s regular message of mutual funds sahi hai (mutual fund is the right way) and instead implies that mutual funds can be risky!
The commercial begins with Tendulkar handing over a helmet to a youngster at the nets, the underlying message being: safety first. When the kid’s worried mother approaches India’s cricketing hero, wondering if her son could get hurt by a quick delivery, he says there’s always a risk when batting, but assures her that her son is prepared.
Tendulkar then draws a parallel with finance, saying that irrespective of whether it’s mutual fund investments or cricket, there will be some amount of risk involved. At that point the boy plays a fast delivery with confidence, the mother looks reassured, and we learn that it pays to be ready for risks – even the type of risks that accompany mutual funds.
Why is the AMFI suddenly trying to spread awareness of mutual funds and risks, when it had for years been chanting mutual funds sahi hai? What changed?
Related: Myths about SIPs you shouldn’t believe
Markets take a hit
It’s investor outlook to mutual funds that has changed. The New Year saw the deadly novel coronavirus add to the chaos in a market struggling to ride out a prolonged slowdown. The result: India’s headline index, the Sensex, plunged some 32 percent between mid-February and mid-March.
Research by ET Wealth found this fall to be more rapid than the ones earlier – be it after the dotcom bust of the early noughties (2002-2004), the global meltdown after the 2008 US subprime crisis, or even earlier following the Harshad Mehta scam. In all such cases, the falls were gradual and stretched over several months. But this time around, the plunge was too deep, too quick.
But it was not only the Sensex that took a nosedive; global indices in the US, Europe, Asia, and many emerging economies plummeted too. Indian investors were rattled: would not the ripples of a global recession reach here? Investors, it seemed, also tended to forget that markets can, and will, fluctuate.
Equally suddenly, it seemed, they started looking at mutual funds with disbelief; that darling of theirs was no longer the safe bet they thought it was.
Related: Should you stick to the old tax regime or move to the new one?
AUM goes into free-fall
It was panic time with people pulling out of mutual funds. Trends in the Indian markets since February pointed to that. As per AMFI data, inflow and outflow for assets under management (AUM) fell from Rs 27.22 lakh crore in February to to Rs 22.26 lakh crore in March – a drop of 18 percent.
Analysts say this decline in the portfolio value – reflecting the sharpest monthly fall in AUM in FY 2019-20 – was primarily because investors pulled out their money fearing a market crash brewing.
This is where an understanding of what SIP offers – and does not offer – can help.
Advertisements from the happy pre-coronavirus days gave the impression mutual funds are an easy way to make money. But as the Tendulkar ad underscored, it is a fallacy to think mutual funds are risk-free. In fact, risk accumulation is a common issue with them, and SIP is not an assurance of higher returns at lower risk.
Consequently, alarmed new investors may be tempted to discontinue their SIP, without realising that what reduces risks are a longer SIP run, and whether the mutual fund is invested in quality stocks.
Related: Savvy millennials betting big on mutual funds
SIPs and exit blues
The advisable way to deal with a downturn is not by exiting your SIP when the market is unfavourable, but by being one step ahead through rebalancing your mutual fund portfolios at intervals. Ideally, you should plan your SIP investments – even when rebalancing – based on your goals and not as a knee-jerk reaction to how the markets are performing.
A Value Research study in 2017 on SIP performance for diversified equity funds over 25 years revealed the downside of discontinuing SIP: the shorter the SIP period, the higher is the probability of loss.
The following table illustrates how the loss probability rose with falling SIP period over the years researched:
| SIP Period | Loss Probability |
|---|---|
| 10 years | 0.30% |
| 5 years | 3.30% |
| 2 years | 16.20% |
| 1 year | 22.50% |
Related: Step-by-step process to starting a SIP
The message is clear: the longer you stay invested in a SIP, the more likely you are to book profits. The study, however, also made a crucial discovery: bad funds invariably let down investors, even with SIPs. If you are invested in an underperforming fund, stretching the SIP does not help. This is why it’s important to balance one’s portfolio.
Looking at it long-term
As the research findings showed, with SIP it pays to have a long-term horizon of about 10 years, maybe more. But why do long-term SIPs yield better returns? Well, this is because bear markets in India seldom go beyond 12–24 months at a stretch. In the third year, the markets begin to bottom out, and in the fourth, the next bull phase starts. By the tenth year, the SIP is well into the black.
This has been the trend in India in the past, and the trick is to not panic. Instead, wait out the bear phase. But even during a sluggish period – like the one we are seeing currently – the best SIP plans are long-term. This is because in a falling market, if you continue with a SIP, you will be basically buying more units for the same amount of money. As a result, over a period, your average investment cost will come down.
However, if you stop your SIP midway, you don’t average out your investment costs, and you defeat its very purpose of meeting your long-term goals.
Related: How to make changes to your SIP instructions
Steady does it
This may sound like timing the market, but it is not. To ‘time the market’ is to deliberately adopt a strategy of buying and selling stocks on the expectation that the price of the stocks concerned will go up or down, based on which corresponding investments are made to make a profit.
Most times, it does not work as ‘buy low now to sell high later’ is a strategy based on assumptions of hypothetical situations. Occasionally, people may get things right by timing the market, but making profits from this strategy on a consistent basis remains elusive to most who try this.
On the other hand, a SIP investment, or sticking to it during a downturn, involves disciplined investing based on long-term goals and research, taking micro- and macro-economic developments into consideration.
There is no assumption involved; any future stock performance a mutual fund is invested in is based on studying up on the company, its stock price movement over several years, and its balance sheet and cash flow statements. Investors also use a SIP calculator to check probable returns on small investments at regular intervals.
Top picks
Most investors find it difficult to choose a mutual fund to invest in, especially if they are new to the markets. Ideally, they should seek the advice of professional financial advisors while investing. However, it also pays to have a template by means of which they can choose funds that are right for them.
One way they can approach this is to evaluate four areas to assess a particular fund; these being the fund’s performance, associated risks, portfolio quality, and management of the fund. Let us briefly consider each of these benchmarks:
- Performance: The fund’s performance must be compared and evaluated against a similar fund.
- Risk: As stated earlier, mutual funds are not without their share of risks. You can base your risk measurement on the fund performance.
- Portfolio: You should look at the type of stocks the fund is invested in; study up on the performance of those companies, and the sector they are in.
- Management: When you like a fund and invest in it, it must because of its track record. What you need to check is whether the fund manager behind that fund's track record is still working for that fund.
In a February 2020 report, Value Research mentioned its top five fund picks for the current year (see table below):
| Fund Name | Fund Type | AUM (Rs Cr) | 3-year returns | 5-year returns |
|---|---|---|---|---|
| Axis Bluechip | Large-cap | 11,077 | 20.32% | 12.06% |
| Axis Small-Cap | Small-cap | 2,084 | 16.31% | 13.81% |
| Motilal Oswal | Mid-cap | 1,986 | 9.34% | 9.77% |
| DSP Tax Saver | ELSS | 6,260 | 11.60% | 11.60% |
| SBI Magnum | Thematic | 3,748 | 10.53% | 7.37% |
Source: Value Research
Related: Large-caps or mid-caps? Tackling the slowdown conundrum
As we just saw, SIPs are designed to take advantage of the different kinds of market conditions; this helps the various stages of ups and downs to deliver the potential returns over the long term. So, if you have done your research and taken a long-term outlook of your SIP, do not discontinue your SIP investments. Weather through the current conditions and behave as if nothing’s happened. You only stand to gain.
Here are some investment tips to prevent the falling GDP from affecting you.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.
