Systematic Investment Plans (SIPs) have long been considered the optimal method for investors to accumulate wealth through mutual funds. However, recently there has been something peculiar going on.

There’s now a wide variety of disingenuous anti-investment propaganda, and it can be dangerous for investors to pay attention to it.

I see a steady stream of social media posts about how SIP investments in many funds have not generated impressive returns over the last few years or so. There have even been some particularly misguided posts that ask the question of whether investors should stop their SIPs.

Even though these articles have generally concluded that SIP should not be stopped, the mere discussion of such a topic at a time when the stock markets are generally stagnant implies a dangerous lack of understanding of what SIP stands for.

Equity investing has its ups and downs, and while we are in a dull phase, I’m hard-pressed to locate a disaster scenario here.

I mean, we’ve lived through the 2008-09 period, when more than half the value of investments evaporated in a matter of weeks, so any lamentations about current SIP returns leave me sceptical about what exactly is being said and why.

Steady run

In a way, anyone who understands the ebb and flow of equity investments, myself included, does not really care about this daily noise. We’ve seen enough over the last couple of decades to understand quite well that not only is this a time to stay invested, but it’s also an opportunity to continue investing, something that is best done by continuing steadfastly with one’s SIPs or, indeed, to increase them.

It’s true that except if one ignores market crashes like 2008, then there are many phases when the broad SIP returns of equity funds can be at a low level. That’s often the result of sluggish but growing equity values during this period. Sluggishly growing equity prices, with phases of stagnation but no deep crash, are almost the worst case for SIP returns.

If the markets crash, then SIPs that are done during that low phase eventually lead to a big boost in returns. This sounds like a joke, but if I’m going to be investing for five years, then the best situation for me would be for the markets to be down in the dumps for four years and then rise strongly in the fifth year. Conversely, a stagnant market that eventually declines a bit at the end would be the worst case.

It is of the utmost importance that investors with a multi-year perspective keep investing during this time because the foundation of future high returns is being laid now.

Regularity is key

Remember that the idea of SIP is that while the general direction of equities is upward, we cannot predict the fluctuations that values may face as part of the overall trend. Instead of trying to do this stop-start, one must regularly invest through SIPs.

As time goes by and the investment’s NAV goes up or down, the volatility will actually ensure that when the NAV is low, you will acquire a larger number of units. Eventually, this is what will boost your returns. This is a time to stay the course and not get misguided about whether SIPs are good for your financial health.

Unfortunately, we also have the problem of anaemic SIPs to contend with. Nowadays, a lot of investors have long-running SIPs. Decade-long uninterrupted SIPs may still not be very common, but they will be in a few years because the SIP culture really started taking hold about seven to eight years ago.

Need right dose

While the net result of the SIP phenomena taking hold is great, one can’t help but notice that far too many investors are taking SIPs in what I would call homoeopathic doses.

For instance, I encountered an individual with a monthly income in the five-figure range who contributes Rs 3,000 per month to an equity fund via a SIP.

This exemplifies a common practice among numerous investors. They diligently maintain SIPs over extended periods but with investment amounts that won’t significantly influence their financial health. Allocating a mere 3 per cent of one’s income to an equity-based asset class suggests that the investment serves more as a pastime than a serious wealth-building strategy.

Compared to what you invest, you will eventually be very impressed by the returns you generate, but it will not make a difference in your life.

The concept I am conveying is quite clear: to achieve your financial objectives, a high rate of return alone is insufficient. The investment must have the potential to attain a sum that genuinely contributes to progress towards those goals.

As savers shift from India’s endemic fixed-income mentality to equity-backed investments, it is natural just to try out things at a low intensity, to dip the toes into the water, so to speak.

However, there’s no point in keeping one’s toes dipped for a decade. If you like the water, jump in sooner rather than later.

The writer is CEO of Value Research