Let the virus not 'SIP' through middle class savings

Let the virus not SIP through middle class savings

India, as of now, remains amongst the less affected nations by Covid 19.  However, the heart breaking fall in sensex has ensured that Corona jitters reach larger number of middle class savings – enabled mainly through the exposure to SIP (Systematic Investment Plan).

In 90s, only a small percentage of household savings were invested into stock market. To achieve government’s agenda of shifting larger share of household savings into financial instruments from hard assets like gold and real estate, the Mutual Fund  (MF) Industry undertook a major PR exercise and advertising campaign focussing on benefits of long term disciplined investing in equity MFs. And since every mass revolution requires an icon, SIP became the icon for this revolutionary shift in investment habit. As a result, majority of Indian middle class (from a travel agent to techie and from clerk to contractor) now sees SIP (in equity MFs) as a panacea for children education, retirement plan, capital purchases etc.

SIP and Wealth Creation : 

Is SIP (in equity MFs) the best instrument for long term wealth creation ? - still remains a debatable issue. SIP-mongers support their claim with historical data to demonstrate that SIP investments over a long period  would have always given above normal returns. Detractors would not only challenge the data and but also argue that even if the historical analysis is accurate, the data refers to a time when the market had very few SIP investors. Today when the market is dominated by the SIP investment, would the principle of Fallacy of Composition not apply ? ( FoC says, what is true for few is not necessarily true for many.  In a football match, if one person stands up, he can see better ; therefore can we say that if everyone stands up all of them will see better ?) .

While this can be a debatable issue, the implied concern brought forth by Corona definitely needs attention. Imagine an investors who had ten years back chosen SIP for his child’s education. By Feb 2020, she would have earned an average of 10% IRR for the last 10 years. And if she had thought of divesting it in March 2020 after her son wrote HSC, she would see zero wealth creation in 10 years….!

Should she blame her banker who had recommended  SIP or the Fund Manager who in his interviews always advised the retail investors to use SIP for long term capital building or the advertisement by AMFI that for children education Mutual Fund sahi hai…?

Now again, the obvious defence would be that the above communications always came with the caveat, “Mutual Fund investments are subject to market risks…”.  But isn’t it also worth pondering is that the objective behind compliance remains incomplete when done only in word and not in spirit ?  

“Cigarette Smoking is injurious to health” had been printed on every cigarette box during 70s and 80s but merely a written message on box never achieved the ultimate objective of reduced smoking. Only when PR around the harmful impact on people in the company of the smoker was amplified and short films showing ill-effects of smoking were made visible enough did we see many smokers reducing their cigarettes consumption during the current decade.

Since the benefits of investing in equity MFs have extensively dominating the pitfalls (risks) in all forms of mass communication,  the country has seen a disproportionate amount of middle class savings chasing a few listed equity stocks.  Does this truly serve the government’s agenda ? The government’s agenda has been to move investments to financial instruments - not necessarily only into equity MFs. 

An opportunity for introspection 

A healthy Capital market would entail two things. Firstly, channelisation of household savings into diversified sectors of the economy and secondly, creation of multiple financial instruments for the said channelisation. The former ensures efficient allocation of capital across the economy and the latter shields households savings from varied risks (like Corona).

A pandemic offers opportunity for introspection. Regulator should use this opportunity to create new structures and instruments for investment in other asset classes. Infrastructure and real estate are in need of massive funds. There may be issues related to liquidity, inaccuracy in determination of NAV etc. but the same can be addressed to a reasonable extent. The former can be addressed through limits on bullet sale and latter through higher exit loads which can be credited to the fund thus creating a buffer against future NAV inaccuracies. Similarly, new formats of ‘Funds of Funds’ should permit investments across various asset classes (Gold ETFs, Commodities, Real Estate, Infrastructure). This will avoid forcible investment by Fund Managers into few stocks even when they himself is not convinced of the same. Further, the nation will benefit through efficient allocation of savings into more deserving and promising sectors.

Shielding household savings against Corona type risk can be achieved only when savings actually moves into other asset classes and other financial instruments. However, the same will not happen till the tax-structures (Income Tax/GST/Stamp Duty etc.) for them are not at par with listed equity funds. This may be a challenging task but catastrophes are times when one takes a SIP of the impossible.

-       Deepesh Salgia, Director Shapoorji Pallonji Real Estate

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#mutualfunds #SIP #coronavirus