Why so many financial advisors and mutual fund distributors consider SIP as the best investment strategy?

When you talk to most mutual fund distributors or financial advisors, you are most likely to come across one common recommendation: start an SIP in a mutual fund scheme. Why do they so commonly recommend this? Is SIP so good?

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The English translation of the article is as under:

Why so many financial advisors and mutual fund distributors consider SIP as the best investment strategy?

When you talk to most mutual fund distributors or financial advisors, you are most likely to come across one common recommendation: start an SIP in a mutual fund scheme. Why do they so commonly recommend this? Is SIP so good?

Well, there are many arguments and counterarguments regarding the merits of SIP. Some tend to indicate that investment through SIP may result into higher returns as compared to lump sum investing and there are arguments against this point. According to me, it is a fruitless exercise to try and figure out which strategy would result into higher returns. It is not the rate of return, but the amount accumulated for a goal that matters to an investor.

Given this, the discussion must shift to the amount required for the goal and the time available for such accumulation. With this information in hand, one has to plan to ensure enough amount is available at the time of the requirement.

There are three approaches that one may adopt:

1.     Investing lump sum

2.     Investing small amounts on a regular basis

3.     A combination of the above two

As we know, most of us often do not have large lump sum amounts available for investment and that most of us earn, spend and save on a regular basis. Due to this situation, regular investing becomes a better option, which helps us channelize our regular savings into productive investments.

SIP is not about earning higher returns, but about getting into a discipline of investing on a regular basis. It is this discipline that helps us accumulate large sums over long periods. Remember the old saying,

Every drop makes an ocean

Small amounts invested over a period have the power to help one reach one’s financial goals. This discipline is similar to the advice most seasoned cricketers give young batsmen – keep taking one and two runs and don’t rely heavily on the fours and sixes, keep rotating the strike. These runs add up to many over the course of a match.

SIP allows you to buy a diversified portfolio through investing small amounts on a regular basis. We have already seen the benefit of diversification earlier. Add to that the other benefit offered by SIP – Rupee cost averaging, which reduces the cost of buying the units. If you keep your money invested for long periods, the power of compounding sets in, helping you create a corpus enough to take care of your financial goals and your financial future.

All the best! Save regularly, in a disciplined way through an SIP.

-       Amit Trivedi

 

How to invest in mutual funds? Direct plan or through distributor?

The debate continues on whether a direct plan is better for investors or should one go through a distributor to invest in mutual funds? Read my views on the same below:

http://epaper.gujaratimidday.com//epaperpdf/gmd/05092016/05092016-md-gm-20.pdf

The English translation is as under:

Mutual fund companies have introduced direct plans some time ago. There have been many discussions around these plans and the advantage of low-cost that these offer. Let us understand these plans and see the benefits to investors. We would also look at the other side: Are there any pitfalls? Is there anything that an investor needs to understand?

First of all, what are direct plans? How do they differ from the regular plans? As you know, mutual funds are sold through a distribution channel comprising of various individual mutual fund distributors, banks and various companies in the business of mutual fund distribution. As per the SEBI regulations, these distributors are required to recommend mutual fund products to their clients based on the analysis of suitability of the schemes to the investor’s needs and situation. For this work and to service and advice the investor on a regular basis, the distributors earn a commission from the mutual fund companies.

A few years ago, SEBI introduced a “direct” plan that would allow investors to bypass the distributors, if they feel they do not need to advice and services of these distributors. Due to this, the expense ratio for the direct plan is lower than the regular plan. The gap between expenses for the direct plan and that for the regular plan may vary from scheme to scheme and from one fund type to another.

One may be tempted to calculate that this difference could make a huge difference over the years. However, prudence requires that one always look at the cost in the context of the value received. Cost for anything can never be high or low in isolation. Does one get value commensurate with the cost?

So what value does a mutual fund distributor provide, really? Many are under the impression that a mutual fund distributor’s greatest value is in selecting the best mutual fund schemes. This cannot be farther from the truth.

First of all, what exactly is “the best scheme”? Are we looking at a scheme that would offer the highest returns in the future? What is the basis of identifying this? Past performance? If that is the way to select schemes, you do not need any help. The data is easily available on many websites – for free.

The “best scheme” is the one that is most appropriate for you – given your unique situation. More often than not, it is not one scheme, but a combination of schemes that an investor needs. A good distributor can help decide on a good combination of schemes. You see, in our regular diet also, while one needs to have varieties to get proper nutrition, one still cannot mix milk and lemon.

A seasoned distributor, a veteran, and experienced one would also be able to put things in perspective better than most investors can do themselves. A veteran is supposed to have a balanced head on the shoulders. This allows one to focus on what matters and think clearly without getting swayed away by the external turbulences. This ability to stay focused helps the distributor to get the client also to focus on what matters most in life. Such a focus then allows the investor to comfortably achieve life’s financial goals.

There are many operational issues that take away a lot of time. In case of such issues, a distributor may know how to handle critical situation since one may have handled the same case for few other clients. For an investor, each issue may present a new challenge taking away too much of precious time. If one calculates the “money value of one’s time”, it may turn out to be much more than the gap between the expenses between direct plan and regular plan.

Think about it – do a rough calculation – you might be surprised.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions. He is the author of a book "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget"

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