SIPping in style: Understanding India's underrated financial revolution
A well-known (albeit often misunderstood) mathematical concept, compounding, promised to save investors from themselves: invest systemically into an asset class or across asset classes for the long term, and reap the benefits of a convex-shaped returns curve. As SIPs came into vogue in India after the 2014 general elections, commentators from all quarters prophesised the bubble to burst as the economy slows, and cautioned retail investors into falling into the charm that basic math offered. The result- as India battles a decade-defining slowdown, SIPs doubled in December 2019 (relative to the previous month), proving that investors are sticking to the mantra they were preached: do not stop your SIP and sell your investments when times are bad, even though equity markets in India continue to chase records and are not moving in tandem with economic growth figures, but that is possibly because they are forward-looking.
According to analysts, the recent rally in large cap stocks (that helped the indices reach all-time highs) led to a renewed confidence in Indian equities. Though the lack of a broad-based rally, with mid-caps and small caps under-performing their larger peers, indicates a flight-to-safety pattern: investors are bumping money into safer, more defensive large caps that can withstand recessionary forces. This behavior became more pronounced with the recent US-Iran developments, with safe havens like gold rising to unprecedented levels.
Going back to SIPs, they allow investors to invest a fixed rupee amount to schemes or selected stocks periodically. That way, investors secure an advantage, also known as “rupee-cost averaging”, wherein you buy assets at average prices, thus not overpaying. This will, in the long-term, guarantee fair returns, and with reasonable belief in the economy, helps to weather the inevitable market movements that result in paper losses. But why settle for average returns, one may ask? That is where the power of compounding comes in. Average returns, when compounded over a long period of time, result in gigantic gains, one that is unintuitive and not naturally grasped by our linear-thinking brains. For example, only a 10% annual return compounded over 10 years results in an INR 1 Lac investment into INR 2.6 Lacs, to INR 6.7 Lacs in 20 years, and to INR 17.5 Lacs in 30 years! Note the exponential nature of returns driven not by intelligent stock-picking or financial wizardry, but by simply exploiting the power of time.
So where should one invest their savings through SIPs? Most experts suggest widely spread indices, to enable greater diversification and earn fair returns consistently. Policy-wise, the government, in keeping with its financial inclusion goal, should further encourage Tier II and Tier III retail players to invest systematically, by easing regulation, widening and incentivising distribution, and providing a wider playground of instruments to invest in (For instance: government debt, in addition to equities).
Meanwhile, India’s much awaited yet underrated financial revolution is well underway.