Santosh Navlani on mistakes to avoid with SIPs

“The simple thing is do not stop SIPs blindly, do not pause SIP till the time you get your plans clear, have an investment strategy in place and then you will not have these worries at all,” says Santosh Navlani, COO, ET Money.

A lot of people are scared of continuing their SIPs looking at the higher market levels.

What do you have to tell them?
Given the lifetime high that the market is witnessing or the new all-time high that we are witnessing right now in markets and it is very normal, it is very human to be concerned about continuing investments in equity funds completely unabated and keep buying at higher levels. At ET Money, we do not believe this is the right way to invest. One needs to take some money off the table and review asset allocation.

If you are someone who is following those principles, you would not be worried and have an investment strategy in place. If you are somebody who is not really aware about the long-term investment plan, if you are not really in control of the asset allocation that you intent to be with, then you may be fearful of investing at these levels and that is very natural. The simple thing is do not stop SIPs blindly, do not pause SIP till the time you get your plans clear, have an investment strategy in place and then you will not have these worries at all.

The most important thing is having your investment strategy in place and having your investment goals lined up and then going in a planned way. That is the basic requirement for a financial portfolio. SIP is a way to participate in the equity market in a disciplined manner and skipping it will dilute the most relevant reason for why it is set up?
Yes. We apt to believe that SIP is a simple and convenient way to continue with investment it without bothering too much about it; but that is something which a mutual fund company would want you to believe. It is in their interest to continue gathering flows, it is in their interest to keep having the fund size becoming larger and larger and they would not even ask you to alter your SIP typically and will not easily allow you to pare it down.

But it is your money which is being put on the table and we all know what happened in the last one year. If that is anything to go by, at least second half of 2021 was quite negative. People were quite fearful about what central banks are going to do next year when inflation is going to be at an all-time high or lifetime high or 40-year high or whatever you want to believe in right now. Everybody will take some action and it will be bad for markets and while that happened, we also got double whammy in terms of the Russia-Ukraine war which has not yet stopped and then there was escalation in oil prices.

When markets are at all-time highs, they require a small excuse to correct. If you do not book your profits, at least take some money off the table, review your asset allocation and rebalance. You would not get it right. I would say that the problem in people’s understanding of SIPs is that you are supposed to have a constant amount going with a constant fund or an asset class and that is not the right way to look at it.

An SIP is supposed to be your savings plan. You are allocating say an X amount Rs 5,000, Rs 10,000 or Rs 50,000 per month to your savings plan for the future and where that amount should go, each month or each quarter or each year may be different. It may go to equity fully; it may go to diversified portfolio equity, debt and gold; it may go in debt and gold and not at all in equity and that is something we need to plan to ensure that returns are stable, better, drawdowns are lesser and surprises are less negative compared to what you may see if you continue putting a constant amount in a same fund each year.

What if someone just believes in investing when the market is correcting and does not want to invest when the market is at a higher level? How does this strategy impact your corpus? Also explain how continuing SIP in all market levels actually helps us achieve a corpus?
If it was in our hands, any human being would actually want to have an SIP run for a few years and have a bear market at that point of time and stop investing once the markets give a bullish move and make a lot of money in that. But the fact of life is markets go in both directions. It may keep going up or keep going down and we would not know what the market mood is going to be the next day or next quarter in that matter.

So the right way to do it is to have an investment plan where you bother with valuations only when they are excessively higher or are bothered about increasing your allocation to equity when markets are quite cheap. You are basically investing in debt investments when interest rates are and you are supposed to have some gold in the portfolio when you believe that there is a lot of economic uncertainty in the marketplace. One needs to plan things in a way so that one invests in all markets, not equity alone. The moment you understand this concept that you are supposed to keep investing every month but not in equity all the time, you will become a far better investor than you can be otherwise.

The next mistake is not increasing the SIP amount and if you do not do that, you are almost doing an RD in equity markets?
Yes. Most of the people in equities who are running SIPs right now, are victims of this mistake in my opinion because we have been informed that one should have a constant amount and continue for a long term in the same fund. This mistake also settles into the fact that we do not increase our SIP amounts.

The simple fact of life is most of us experience a rising income annually every year. It may be 5%, it may be 10%, 15% or 20%. That should also ensure that you are investing more for the future. What happens is while a lot of people get increments in terms of their business income or salary, they increase their expenses but they do not increase the SIP. The savings basically lie in the bank accounts or accumulates and that money gets expended on to a larger consumption item and things like that.

If you do not really increase SIP, then you are not buying into the future. We did some analysis in the past and if you look at data, if you have an SIP of say Rs 5,000 each month and do not increase your SIP, then you will have some x value over a period of time but the moment you increase SIP by 5%, the amount almost nearly doubles. If you increase that by 15%, it might go 2X, if you increase by 20%, you might have 3X more corpus.

So by just increasing SIP by 10-15-20% annually or whatever you can afford, each year can actually make a meaningful difference in the end corpus you will have because it is not just the SIP amount you are investing, the compounding on that will keep coming in every year as well and you would make a lot of money in the future.

So if you want to achieve your financial goals the fastest way to actually ensure that you keep increasing SIP amount every year.

How important is it to choose the right plan within a mutual fund scheme? Talking about dividend plans, why is it a mistake or is it a mistake?
I would say it is definitely something which is unwanted. I would not call it a mistake in a negative way but it is far moe desirable for any investor to have an SIP in an equity scheme or a fund and having a dividend option selected there or even for debt for that matter.

Let us do simple calculation here; if there is a regular dividend coming in at least once a year, it is actually coming from your corpus and the NAV falls down and the money is hitting your bank account and this amount is actually taxed at your income tax bracket. When you are earning some dividend from the mutual fund company, you are supposed to pay tax on it. When you pay tax on it, there is a further loss of money and the money that you get back in your bank account does not compound any more vis-a-vis a growth plan.

When you invest in a growth plan, the money does not kind of come to you in the form of dividends. It keeps growing every year and that re-invested money becomes a larger corpus and when you sell that, you are only subject to long-term capital gains tax of 10%. Now imagine you are actually getting some kind of cash out every year and paying your taxes as per income tax bracket versus actually letting the money go and compound for a long period of time and only pay 10%! You are far better off by investing in a growth plan.

That is only equities, when you look at debt it becomes far more tax disadvantaged compared to growth plans. In debt, you actually pay short term capital gains tax for almost three years. So all your money continues to be taxed at 30% if you are in a higher income tax bracket. If you buy a growth plan of a debt scheme, you get an indexation benefit after three years of holding. So taxation there is far less than 10% in many cases.

In both the asset classes – be it equity or debt, you are better off by investing in a growth plan. You can withdraw money whenever you need if there is an emergency, instead of having some kind of fixed payout coming in every year or on a periodic basis from mutual fund companies.

Another common mistake is not having a specific goal or a SIP oriented investment approach and monitoring your SIPs periodically. How can one solve that?
If you don’t have a goal, basically what happens is you are investing in a random set of funds just because you believe that you need to start saving money on a monthly basis which is a great habit to build, but not having a goal or end objective attached to it basically makes you prone to some kind of impulsive behaviour like pausing SIPs in between, skipping SIP instalments in between and not really increasing SIP amounts as you keep earning higher incomes. Or for that matter, if there is a large profit there, you may withdraw it just because you want to feel like booking some profits or buying something of high value which you may not afford by your bank balance in that sense.

In all the three, four cases what happens is you end up breaking your compounding and when you have a goal attached to it, something like a child’s education goal or retirement goal, you become far more disciplined and emotionally attached to that goal and the corpus value. The return value does not make a difference. What makes sense is whether you are on the right track to accumulate Rs 2 crore for your retirement corpus or Rs 1 crore for your children’s education.

The goal orientation will make for a far more disciplined and patient investor. So goal attachment plays a big role in emotional correction in behaviour as an investor more than anything else.

The second aspect is not to review SIPs. People do not review their asset allocation, their investment plan, the fund performance. If you do not do these, then basically your returns may be suboptimal in nature. If you continue monitoring along with an investment plan, then your returns tend to be far better compared to you would do otherwise. These two things are more important on an emotional level than giving any kind of tangible benefit in the short term.