Reasons that have led to a rising demand for SIPs in India

Systematic investment plans or SIPs, despite being one of the most documented and scientific methods of earning wealth in the long run, have faced some scrutiny in the past few years..

The idea, while not new, has been well promoted by brokers and mutual fund distributors for more than 2 decades now. But the demand that the mode of investment has been witnessing since the past two three years has risen to a never-before-seen level..

rising demand for SIPs in India

Ever since the year  2008 - when the downturn of market began, equity based mutual funds were in demand. However, since 2014, the trend changes and what came to predominance has then remained till date. The trend was called Systematic Investment Plan or SIP.

In this article, we will try to analyze the reason behind this rising trend.

 

Reason 1: In all honesty, this rise in  demand has not resulted from some instant shift in Indian investors toward SIPs. This  has come as a ripple effect of the past 20 years. If there is anything that the 9 years have taught us, it is that the time period of 2008 and 2017 stayed with Sensex returning only 3.95% on CAGR basis.

The number is even lower than a saving account deposit and is representative of the down risk of lump-sum investment.

On the other hand, SIP starting from 2008 has performed extremely well as it made the best out the 2009 lull and the downward looking phase between 2011 and 2014.

Reason 2: The investment avenues which were once considered extremely lucrative are not given much importance now. From an individual perspective, all the preferred avenues are failing to serve their purpose.

To start with, Bank FDs started getting a declining demand because of the repo rate picture of 2 years and the fact that they are unable to cover the inflation rate in these post-tax terms.

Property transactions have a very similar story to share ever since the 2007 crisis and demonetization making it difficult to buy and sell property.

In the end, with government limiting the gold holdings, the investors are anyway left with minimal options. The one credible way to gain wealth is what SIP came with as its offering. Ergo, the demand.

Reason 3: The biggest advantage that any Systematic Investment Plan comes with is it’s capacity to withstand  volatility. With Nifty hitting new heights every passing day, there is always a huge risk of volatility arriving out of several domestic and global factors. What happens in SIP is that you allocate a fixed amount of money every month without paying a heed to how the market is behaving. Equity based SIPs emerge as a solution to this. This SIP type won’t just give you the best value when the volatility is low but also helps you eliminate the risk attached with the market’s highs and lows. Therefore it comes as a passive approach of equity investment that has proved to have outperformed the index regularly on empirical basis.

Reason 4: The last reason behind this growth is that people love the tax saving element that SIPs come with. When we talk about the creation of wealth in the long term, there are two things to consider - A. the investment mode should save tax and B. it should help remove the risk of reinvestment.

Like a number of other equity based mutual funds, SIP also gives you the benefit to save tax and get dividends that are tax free if held for a time period of more than one year.

This tax saving plus high return advantage that equity based SIPs come with is what makes them a lot more attractive option than property, Fixed Deposits, and Gold. However, the dominant advantage of it all is that with SIP one doesn’t even need to worry about the risks associated with reinvestments as it is already settled by the fund manager for them. A privilege that fixed deposit, property, and gold investors don’t have.

This shift towards equity based SIPs that has become evident in the past some months is not an overnight event. It has resulted from a comprehensive impact of 20 years made up of several ups and downs that investors had to face in Indian market.  But whatever be the reason, the one thing that we should rejoice from is that people are finally paying attention to creating long term wealth using the time tested method.