SIP Investing And The 'Behavioural Gap'

While reviewing SIP (Systematic Investment Plans) performances for Mutual Funds today, I discovered that Franklin India Smaller Companies Fund, a top rated small and midcap fund launched in 2006, had delivered an astounding 10-year SIP CAGR of 22.6% per annum from March 2007 to March 2017. To put this in perspective – a monthly SIP of Rs. 20,000 which would have run unbroken in that period would have grown to nearly Rs. 80 lakhs as on date.

And yet, just how many clients do I know who started SIP’s of Rs. 20,000 ten years ago, and are sitting on a neat corpus of Rs. 81 lakhs? None. And the difference between 22.9% and the returns earned by these clients is known as the ‘behavioural gap’. The behavioural gap in returns is the reason most investment proposals that carry published past returns are greeted with scepticism by would-be investors. After all - most investors, swayed by the vicissitudes of the securities markets, would have likely carried out at least three actions that would have impeded their potential corpus growth. Let’s acquaint ourselves with some of the behavioural biases that many smart SIP investors succumb to all too often.

Your first enemy is the action bias, or the tendency to grow impatient when things don’t go exactly as anticipated. Since SIP’s run contrarian to the market, netting you more units when markets fall and vice versa, there could be extended periods of accumulation when returns are flat to negative. When this happens, the immediate solution is to go out there and ‘do something’ with your portfolio. Bear in mind that in doing so, you might just be switching out of a potential star, into a potential lemon.

Your second enemy is the loss aversion bias, or the tendency to pack your bags and scoot every time your money slips into the red. This trait is more pronounced in investors who check their portfolios more frequently. Think about this – the NAV of Franklin India Smaller Companies Fund fell from Rs. 9.9 to Rs 5.5 in the two years succeeding March 2007. Your hard-saved SIP investments would have been deep in the red by then. Would you have stayed put, let alone continued to let your SIP’s run amidst the throes of the hellish bear market that marked the year 2008? Not likely.

Your third enemy is the tendency to get swayed by deliberately sensationalized stories. In the past ten years, doomsday predictions have come (and gone) countless times. Buffeted by these tumultuous forecasts, chances are that you would have stopped and started your SIP’s (and redeemed, and switched your corpus around for good measure) at least five times in this period. No prizes for guessing that this single act would have drawn you far apart from the ‘on paper’ ten-year return of 22.6%.

Admittedly, markets can be treacherous, testing even the most seasoned investor to the hilt. Hindsight is 20-20, and it’s easy to look back and preach the benefits of having stayed put and kept your SIP’s running. In all fairness, you’ll probably never fully capture published returns from most investment products - but awareness of your own biases can certainly help narrow the behavioural gap.