SIPs Are Like Marilyn Monroe: "If You Can't Handle Them At Their Worst...''

Back in 2012, I interviewed the late Parag Parikh when he was about to launch PPFAS Mutual Fund. Besides his contrarian investing style, the one thing that stood out about him was his refreshingly candid take on things. This was when mutual funds were witnessing outflows for years and assets under management stood at a little over Rs 5 lakh crore - largely debt-oriented.

When I asked him how he planned to garner investments at a time when mutual funds weren't in favour, he said: "By being on the side of the investor". He then pointed to a note he had gotten stamped on the physical prospectus of the AMC's inaugural equity fund that said: "Please do not invest in this fund if you can't remain invested for at least five years".

I can't draw a straight line from the note to PPFAS' outperformance over the past decade, and the swelling of its assets. But surely, sobering investors' expectations when the temptation is to oversell helps attract the right set of investors who won't leave when the going gets tough.

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Don't Blame Your SIPs

Which brings me to the chatter over SIPs of late, as returns have remained muted for years amidst a sideways market.

Veteran investor Shankar Sharma seemingly mocked SIPs, saying they were a great product - but only for institutions that used it to sell expensive stocks to retail investors.

I have a different take. SIPs are a great product for retail investors, so long as expectations are rightly set.

For years, the industry has sold SIPs with the market squarely focused on returns but not risk. (That financial theory and practice equate risk with volatility is itself an awfully incorrect way of looking at things but that's a piece for another day.)

But all of investing boils down to a few basic truths - even first principles, if you will -- which the industry, and I dare say, financial media, overcomplicate.

Let's look at them from the Indian context:

1. Indian economy grows at an average 6%. Add another 4-6% by way of inflation, and we look at 10-12% nominal growth.
2. Consequently, companies, on average, will grow their earnings at a similar 12% rate - Sensex EPS data from 30 years bears out this correlation nearly one-to-one.
3. Assuming the market is fairly-valued (say an index price-to-earnings multiple of 16), you can expect 12% returns over the long term. Money doubles every six years. Pretty decent, though not spectacular.

The problem arises when the market goes from fairly valued to over valued, and investors are shown the recent 20-25% CAGR picture, without a warning that periods of underperformance likely follow periods of outperformance.

The standard disclaimer - "past performance is not an indicator of future results" - doesn't amount to much if the risk of negative or low long-term returns isn't specifically communicated in the context of the current valuation picture.

So, if, as an investor, you're unhappy with your SIP returns, you've been sold the right product with the wrong expectations.

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What You Should Expect Now

SIPs aren't a magic bullet that will always give good returns. Over a period of three-five years, their returns very much resemble a spring. If the market has fallen sharply recently, they will likely do well. If you start when a lot of the money has already been made recently, you will likely have to endure pain.

We're in the pain phase now, meaning that sooner or later, things will turn for the better. So, if you're an investor, this is the time to stay the course and not to throw in the towel.

The question is how much better.

After all, the market has only gone from expensive to less expensive.

Plus, the market is not fully pricing in changing global dynamics. Should equities be valued in the same way in a deglobalising world order, as they were in a globalising world where flow of capital was entirely driven by merit rather than also nationalistic considerations?

And it's not an overstatement to state that AI is the most powerful disinflationary force the world has, and will likely, ever see. Meaning the 6 + 6 math I outlined earlier could likely become 5 + 4 or thereabouts in the future.

So, if you continue to invest without worrying about returns, your SIP returns will likely go from poor to decent to maybe even amazing in due course.

Put simply, if the SIP could speak, it would liken itself to Marilyn Monroe who famously said: "if you can't handle me at my worst, you don't deserve me at my best."

I only wonder if you factored this in when you began your SIPs.

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