SIP best bet during mkt volatility

There have been some reports of late that despite investing in MF through SIP has not delivered returns in the last five years. The results are true but certainly the interpretation is not correct and of course the headlines cry something else altogether.

When we dwell deeper into the details, the analysis brings out that almost all the funds are of small cap category. If we look at the small and mid-cap stocks, the indices themselves, are at a discount to their five-year period and some of the individual stocks have gone into abyss.

What I meant about interpretation of this analysis is the timelines being considered is a point of contention. When we make a random approach at picking up some timelines for comparison of the mutual fund (MF) performance, the data representation may not give out the right analysis.

This is because the market operates in cycles and each cycle has a set of winners and losers. It's difficult to time the market or assess what sectors or cycles play out into the future, at least not always.

For instance, if the current market conditions are negative to small caps, a couple of years back a similar analysis would have put these very small caps at the top of the performance table on the very timelines being compared.

This doesn't, however, diminish the possibilities a systematic investment plan (SIP) could do for the wealth creation of an investor.

To demonize SIP with misleading headlines wouldn't offer much help to the awareness of investing as a whole and in particular into equity-oriented MF investments.

This is extremely critical with the current penetration being very minimal, such misguiding literature could derail the overall benefits of investing in equities.

What, however, needs to be brought into public domain is the need for diversification, portfolio creation and asset allocation!

When someone invests majority of the investments into one basket, the fortunes depend upon the performance of that particular avenue.

This could be offset by diversification where the investment is spread across various avenues, ideally non-correlated so that the returns are independent of the market conditions.

Diversification could be across asset classes and within the same asset class one could find lesser correlated avenues. For example, when one divides the investible surplus across various capitalisations i.e., large, mid and small caps then the overall investment is likely to have a better beta to the overall market.

Beta is the relative volatility of the portfolio with respect to the benchmark or broader market. So, diversification is achieved through portfolio creation and the proportion of each of the diversified asset class or sub-class depends upon the risk appetite of the investor and timelines of the goals.

According to research, asset allocation is a key determinant for portfolio performance over long run with 91.50 per cent while the much-touted 'market timing' comprises only of 1.8 per cent.

What should be inferred out of this study is that a right asset allocation remains key for the success of a portfolio and thus an investment and timing the market turns irrelevant.

SIP, by design is an anti-thesis to market timing. It also brings in various advantages of cost averaging, regularity and discipline required for investing in equities.

The other mistake many investors do is to chase for the past performance and invest in previously performed funds. As the disclaimer goes, past performance is not an indication of the future results, such selection may not provide for better results.

Also, in the garb of picking up the best performing funds, one may end up duplicating the same asset class or sub-class which turns the whole idea of diversification redundant.

Investors are hence advised to choose the funds and proportion of allocation towards each of these funds based on their risk appetite and goal timelines.

So, the earlier analysis should serve a lesson to the investors about the importance of diversification and asset allocation. Moreover, how they should allocate to these funds depends upon their timelines matching their goals.

(The author is co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])