The mutual fund industry (and its trainers) has shouted so much at the top of their lungs that most clients feel guilty about stopping their Systematic Investment Plans (SIP). This is ridiculous, and obviously, not correct.SIP is at best a ‘saving’ strategy like recurring deposit. I think we should stop looking at it like an investment strategy. SIP does not ‘eliminate’ risk; but yes, it dramatically reduces the shock of lump sum investment.
I do believe that for a retail investor, the best way to take exposure to capital markets is through the mutual fund route. This is because mutual funds are managed by professionals who keep track of developments in the world economy and finance, and take decisions that works well for the portfolio and consequently its investors. While investing in the current market, one can consider SIPs or Systematic Transfer Plans in mid- and small-cap schemes or even dynamic asset allocation schemes.Having said that, let me tell you why a few friends and me myself have either stopped or dramatically cut back on the SIP amounts (I used to do a big SIP into an ultra-short bond fund. I have stopped one and reduced the other).
Let me get specific about my own projected income. I expect training to go down in the quarter starting May. So May, June and July is expected to be a washout, and income may not allow much investment possibilities. I have close to zero interest income. My rental income is likely to go to zero in February. So honestly, I will have to wait till September to go and commit to an SIP.
Now, I have friends who are in senior posts, owners of businesses (hospitals), doctors, etc. Most of them are scared of the forthcoming cash crunch. They are not worried about their day-to-day living, but most of them are shutting their SIP for three-to-four months. Fair enough. Conserving cash is the most important thing that a businessman does. One of them has dramatically repaid his term loan while keeping his bank overdraft on. His logic? He wanted to reduce costs. And remember, 9.15 per cent per annum interest is not small. Another friend called me and after talking to me broke his bank fixed deposit and repaid the bank loan. Obviously, his SIP has gone for a toss.
None of my friends are likely to withdraw desperately from the equity market, but one friend withdrew from the equity market at the peak — 41,000 Sensex. No, not any intuition, just that he wanted to book profits and the grandfathering meant he was not making more than `1 million.
There are two reasons why a person stops his SIP: a) when he is afraid that the world is going to come to an end, and b) when he has a cash flow crisis due to change in business circumstances. The first reason is wrong, the second reason is right.
So, don’t get carried away by the propaganda that SIP should never be interrupted. It should be. If you have lost your job, you will sit on cash (I know it is unprofitable). If you are a businessman, it is your duty to anticipate working capital problems. If you are a senior executive above 50, expect retrenchment.
Stop falling to the propaganda.
PV Subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest Rs 40 a day’