Investing in mutual funds does not start and end with just SIPs

In fact, SIPs might be more widely recognised than mutual funds themselves. Once considered a strategy primarily for salaried individuals, SIPs have now gained popularity even among high-net-worth individuals (HNIs).

While they promise discipline and long-term wealth creation, the question remains—can SIPs alone secure all financial goals, or is a more diversified approach needed?

Understanding SIP growth and market realities

Consider this: You start a monthly SIP of ₹1 lakh, investing a total of ₹60 lakh over five years. With a strong 15% CAGR, your portfolio grows to ₹90 lakh. But if the market takes a 25% hit, your investment shrinks to ₹67.5 lakh—leaving you with a modest 4.5% CAGR.

Also read: Mutual fund industry unfazed as rattled investors rush to pause investments

Would this outcome be disappointing? Many investors would think so. 

Despite following disciplined investing principles, the returns might barely match fixed deposit rates. This is not hypothetical; historical data shows that several five-year SIP periods in large-cap funds have delivered less than 5% CAGR, sometimes even negative returns. The situation is even starker for mid- and small-cap investments.

Key considerations for SIP investors

To improve investing outcomes, SIP investors must consider the bigger picture beyond just automation and discipline. Here are a few crucial insights:

1. Managing growing wealth: While automated SIPs instill investment discipline, effective management becomes crucial as the corpus grows. Large drawdowns can erode both portfolio value and investor confidence. Many start as SIP investors, but over time, their accumulated wealth turns them into lump-sum investors. Having a strategy to manage these lump-sum amounts is key to long-term financial success.

2. Assess your risk tolerance: Investors need to evaluate their comfort with volatility and potential losses. Some key questions to consider:

• What level of drawdown am I willing to accept?
• Have I experienced a similar drawdowns before, and how did I react?
• Do I have a plan for handling market downturns?

Preparing for these scenarios helps investors stay the course, which is critical for long-term success.

3. SIPs require patience: SIPs inherently delay risk-taking compared to lump-sum investments, where the entire corpus is exposed to market fluctuations from day one. This makes SIPs a slower wealth-building strategy, requiring even greater patience. Despite their popularity, very few investors continue SIPs uninterrupted for over a decade.

Also read: Sachet SIPs: Can ₹250 a month create an investment boom in India?

4. Counterintuitive investing behaviour: Ideally, an SIP investor should prefer markets to remain low for extended periods, allowing accumulation of units at lower costs. However, prolonged low returns often discourage investors from continuing their SIPs. Many have fallen into this trap before, and many will in the future. Recognising this paradox can help investors stay committed.

5. Minimising investment mistakes: Every investor makes mistakes, but successful investors make fewer and smaller ones. Developing sound investing habits can improve outcomes significantly.

From SIPs to lump-sum investing

All SIP investors eventually become lump-sum investors as their corpus accumulates. Managing wealth is not just about investing regularly; it also involves learning how to handle larger sums effectively. 

Investing is emotional, and new investors often repeat the same mistakes—exiting at the wrong time, overreacting to market downturns, or misallocating assets. While financial knowledge isn’t rocket science, it does require time, effort, and some guidance to avoid costly missteps. Investors should be clear about:

· Portfolio structure: What should your ideal portfolio look like?

· Scheme roles: How does each fund contribute to your investment strategy?

· Drawdown impact: How do market fluctuations affect large-, mid-, and small-cap funds?

· Risk management: What is your approach to mitigating investment risks?

· Portfolio review: How frequently should you assess and rebalance your portfolio?

· Emotional discipline: How do you manage psychological biases that lead to poor investment decisions?

· Asset allocation strategy: How diversified is your portfolio across different asset classes?

· Tax efficiency: Are you optimizing your investments to minimize tax liabilities?

· Exit strategy: Do you have a plan for systematically withdrawing investments when required?

Why expert guidance matters

If managing these complexities seems daunting, seeking professional financial advice is a wise choice. 

Big investment decisions involve high stakes, and errors can be costly. Whether by enhancing your financial knowledge or consulting an expert, ensuring informed decision-making is key to long-term wealth creation.

Starting SIPs early and increasing contributions regularly are great habits, but they alone are not enough. As your portfolio grows, so does the need for strategic financial planning. By balancing discipline with proactive management, investors can optimise their wealth-building journey and achieve better financial outcomes. 

Also read: ICICI MF Naren’s SIP warning: Reality check or fear-mongering?

Understanding risk, reviewing investments, and managing market downturns effectively will help investors navigate the challenges of wealth creation with confidence.

Kushal Bhagi is owner PCC Investing and a Mutual Fund Distributor (MFD)