‘SIPs Force One To Be Committed To Investments Across Various Cycles Of The Market’

R. Raja, Head- Products, UTI AMC speaks to BW Businessworld on how retail investors should approach SIP investing, on whether timing the market is important while starting a SIP, and how to act during periods of low or negative market returns.

What are the typical investor behaviours and actions that prevent them from creating wealth from their SIP's in the long run?
For most investors, the hardest part is not figuring out the optimal investment policy, it is staying committed to sound investment policy through bull and bearish markets and maintaining "constancy to purpose". Sustaining a long-term focus at market highs or market lows is notoriously difficult. At either market extremes emotions are strongest when current market action appears most demanding of change and the apparent 'facts' seem most compelling. At these points the cost of infidelity to one's own commitments can be very high. . Plan your play and play your plan say the greatest coaches. Stay the course and setting the right course takes to investment decision of diversifying across assets in a systematic and disciplined manner. Be patient -good things come in spurts-usually when least expected. If you missed those few and fabulous periods, you would have missed all the total returns accumulated over three full generations.
"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally". SIP mimics regular and recurring deposits. It is an anti panic device when markets fall. The inability to predict our own business behaviour under emotional strain is called as an empathy gap. Everyone encounters empathy gaps. For instance, just after eating a large meal, one cannot imagine ever being hungry again. John Templeton says" The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell". Few would disagree. However, when everyone is busy despondently selling, it can be hard to stand against the tide and buy.

SIPs force one to be committed to investment across various cycles of the market- be it bearish or bullish and helps one to overcome these empathy gaps.

Often, investors go through prolonged periods of low returns or even negative returns in their SIP's. These phases might even last for 2-3 years or more. What would your advice be to an investor who is caught in this unfortunate situation?
Systematic Investment Plans may not a sure recipe for success. However, if the investor is concerned about minimizing downside risk and the potential feelings of regret(resulting from lump-sum investment) immediately before a possible downturn , then the SIPs by combing the cultivation of good savings habits to deal with temptation, framing effects that reduce pain of loss and conventionality that mitigates feelings of regret.

An investor who finds his/her investment depreciate should introspect and find out the reasons for underperformance of his/her investment. The reasons could be one or many of the below mentioned reasons:
1. The negative returns due to the capital markets not doing well
2. The markets have done well but the fund in which SIP has invested has underperformed the broad-based market.
3. The fund is theme or sector based and the sector or theme concerned did not perform well.
Equities outperform other assets over a long period of time and if the markets have done well during certain periods of time, there is need to wait patiently for the markets to deliver returns. If the negative returns are due to the fund not doing well consistently, there is a need to switch to another fund which has performed well over a long period of time. Temporary underperformance of a fund does not warrant exit and one should evaluate the performance of a fund over all cycles -bullish or bearish or range bound to determine whether to exit from the said fund.

Should investors consider the current state of the market while starting their SIP's? For instance, is it wise to start a SIP when the P/E of the Nifty is at an all time high? If not - how can a retail investor get the timing right?
Raja: It is very difficult to get the timing right. In most of the cases, the time in the market is more important than timing. An investor could invest systematically invest across all assets say a mutual fund investing in equities, debt, balanced fund or an asset allocation fund to moderate the volatility and lend stability to returns. To bring home the said point, let us consider an experiment:

The person sits in front of two lights (one red and one blue) and is told to predict which of the lights will be flashed on each trial and there will be multiple of such trials. The experimenter has actually programmed the lights to flash randomly, with the provision that red light will flash 70 per cent of the time and the blue light 30 per cent of the time. In 100 trials , if the subject switches between red and blue, he will get 70 per cent of 70 those 70 trials and 30 per cent of 30 trials correct which will be 49+9 =58 trials. Had he stuck to predicting red light it would have been 70 per cent. Predicting markets with some accuracy often involves accepting error in order to reduce error, that is better prediction by relying on general principles but acknowledging that we cannot be right in every single case. An effective strategy need not be effective in every single instance. The same is true for systematic investment too. Investing smaller amounts in the form of multiple bets offer time diversification, where the people may feel that they have law of averages by their side.