S.I.Ps are a wonderful way to steadily accumulate an appreciating asset. But for it to work, you need to be watchful of your accumulated portfolio, as your goals near. Else, S.I.Ps can end up disappointing you, despite years of patiently saving and waiting and leaving you wondering, what went wrong with your assumptions?
Mutual funds sahi hain ! Lekin ..
Most of us save for our long term goals by way of a monthly S.I.P into Equity Funds. At the end of the long wait, our satisfaction levels are largely determined by market trends, as our goals near. For the unprepared, which means for most of us, markets are likely to leave us dissatisfied, despite years of patiently saving. Let me illustrate a case study
Imagine that on someone’s advice we started a SIP of Rs 5000 on Jan 3rd 2008, for our child’s under graduation abroad. 10 years later, our investment into a decent fund like, Franklin India Prima, would have made us happy upto Jan 3rd 2018, thanks to the value of the portfolio that grew to 20 Lacs approximately. But from then on, the subsequent market slide till now would have made us anxious. It would have been painful to watch the 22.73% CAGR and the capital that tripled upto Jan 2018, start to dwindle to a CAGR of 15.48% despite continuing your SIP for another 18 months until now, August 25th 2019. What-if the last 18 months were a repeat of 2008 market collapse instead of a correction that we witnessed? It would have set us back by more than half a decade of savings and our dream for sending our child abroad may never fulfil in time.
What went wrong?
The advisor simply forgot to tell us that our accumulated value of savings upto Jan 2018, ran the risk of the same correction like any other Lumpsum made around then. Why? Valuations that reached a 20 year high, had to correct. Especially in Mid-Cap funds which were even more expensive with poorer growth. In this case, our advisor has simply ignored the signs and failed to warn us, when markets reached such extraordinary valuations not backed by commensurate corporate profit growth.
How difficult was it to see the need for safety when markets diverged so far away from earnings in 2018 Jan, just like they did in 2000 or 2008 Jan?
Unless the advisor lacked the skill to recognise increasing market risks or lacked the intent to tell us the truth, we could have switched the accumulated portion from the SIP into a Liquid fund, at least partially. And continued the SIP for rupee cost averaging. Assuming we did a complete switch in Jan 2018 into a Liquid Fund that earned 7%, when valuations touched 2000 & 2008 like peaks, the value of a Rs 5000 SIP would have been even higher now at around 21 Lacs rather than 18 Lacs. One can only thank God that we aren’t calculating the difference after a 2008 like scenario, where markets eroded roughly by 50% and could have set you back by nearly 4 to 5 years of growth. And it that happened, all our plans around our child’s education would have been at risk
What should S.I.P investors do?
Recognise that a S.I.P has two parts. An accumulated value of past SIPs that “IS subject to market conditions”. And future instalments which helps you average out the volatility
For the first part, we must secure the accumulated value of your SIPs, when valuations reach unsustainable historical peaks, by switching 30% to 50% in recognition of increasing risks after a fall
As to the second part, we must continue the S.I.Ps in the Equity funds unless the time left to your goals, is less than 2 years. The last two years is very critical where the focus should be on principal preservation rather than return maximisation. All the accumulated equity value, for goals that are now near should be switched into low to moderate risk debt funds
Heads you win. Tails you don’t lose
S.I.Ps are as risky as Lumpsum investments. Especially after years of accumulation and when you are closer to your goals.
The success of an SIP should not be entirely left to the market trends, as our goals near. We can fulfil your goals with greater certainty by managing risks to our portfolios, even if it’s through an SIP.
It is time to get a good advisor like WealthSecure, who understands your goals, the portfolio and market risks and helps you manage them to ensure goal fulfillment