A perfect lesson on SIPs

The market gyrations around the election results were a perfect lesson in the value of steady, sensible investing

A week ago, I wrote about those investors who tried to invest in mutual funds on June 4 in order to get a low NAV. That was the day when the Sensex was down 9 per cent at the point. While most investors were cutting and running, a few brave souls decided to invest in equity funds that day and get a low NAV. Remember, if you invest before a designated cut-off time on any day, your units should get allocated at that day's NAV. However, there are many moving parts to the machinery, such as the front-end app you are using, banks, the clearing house, the registrar, the fund and so on. If the investor's money does not reach the fund in time, then the investor cannot be allotted units on that day's NAV.

As happened on June 4 and 5, many people complained about this on social media. They claimed that despite placing their mutual fund investment transactions well in time on June 4, they did not get that day's low NAVs. Instead, they got June 5 NAVs, which were higher by perhaps 2 to 3 per cent for most equity funds.

While some punters tried to trade mutual funds and didn't succeed, another group succeeded without trying, and there lies an important lesson.

Around the beginning of this month, an acquaintance who recently retired from a senior government job contacted me to plan his post-retirement investments and income. After some discussion, we made a list of funds in which he would start SIPs. By pure coincidence, we finalised the investments on June 3, the first day of trading after the exit polls. Stock prices were zooming up, but since we were starting long SIPs, we hadn't even looked at the markets. While we placed the transaction orders on the evening of that day, my friend got the next day's-June 4-NAVs. Of course, that was the day the market crashed.

Since then, stock prices have shot up, and the indexes and most diversified equity funds have been at all-time highs. The investments that my friend made that day are up by about 8 per cent. However, this is actually irrelevant. By itself, it does not matter at all. The investment that my friend made was just one month in a 24-month SIP series. Yes, it's up nicely in just a couple of weeks, but the point is not that it's up; it is the nature of SIPs. Some months, you get a bump up, and some months, you get a push-down. You get a few fewer units in the former and a few more in the latter. On the whole, it works out well as the markets rise over an extended period of time.

The point is that steady SIP cost-averaging is the right way to do this, and timing the market is not a reliable strategy for most investors. Trying to predict short-term market movements often leads to missed opportunities and disappointment. What truly matters is the consistency and discipline of investing over the long term. Market fluctuations are part and parcel of investing in equities, and those who remain patient and focused on their long-term goals are more likely to reap the rewards.

The true value of systematic investing lies in its ability to mitigate the unpredictability of market fluctuations. While the short-term gains my friend experienced are gratifying, they are not the essence of successful investing. Instead, the crux of effective wealth-building through mutual funds is rooted in the principles of regularity and patience. No individual day matters all that much-but the aggregate of all days will make you rich.

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