Ratan Gaikwad, while on his way to renew his mutual fund investments, was told by a friend that he invest directly with the asset management company to save on the 2.25 per cent entry load paid to the distributor.
Since January 4, the capital markets regulator, Securities and Exchange Board of India (Sebi) has abolished entry load on direct mutual fund investments.
Gaikwad, a 28-year old freelance artist, thought that his friend’s idea was great. It just required a few hours to go to the fund house and fill up the necessary forms. However, in the last three months, he has not found those few hours.
The schemes that he invests in through systematic investment plans (SIPs) were up for renewal in April. Since he did not do so, he has missed his SIPs (Rs 10,000 a month). Last week, he finally went back to his distributor to restart them.
“SIPs are a disciplined approach towards investing. Missing them can impact your corpus significantly,” said Kartik Jhaveri, a certified financial planner.
For instance, to retire at 58 and create a significant corpus by then, Gaikwad needs to keep investing for the next 30 years. If mutual funds give an average annual return of 15 per cent, for a missed SIP of Rs 10,000 in the 13th month, he stands to lose Rs 5.76 lakh from the entire corpus. If invested, the final returns over 29 years are Rs 12,954. In other words, he stands to lose (Rs 5.76 lakh– Rs 12,954) Rs 5.63 lakh.
Gaikwad may also have thought that since the markets are tanking anyway, the returns would not be greatly impacted. However, in a bear market it makes sense to continue the SIPs.
“The returns from an SIP can be impacted adversely, especially if one misses investing in a bear market. This is because when the market turns around, the returns are much higher because of the additional units,” said a wealth manager.
Further, investing through SIPs insulates you in some ways from vast market movements. This is because the investments are being made in a staggered fashion and not in one go.
Let’s consider returns from Tata Infrastructure Fund over an eight-month period, starting January. For instance, the value of an SIP of Rs 10,000 per month in Tata Infrastructure in the last eight months would have fallen by -6.33 per.
On the other hand, a one-time investment of Rs 80,000 would have lost -30.47 per cent. Of course, the reverse is also true that in a bull market, one-time investments yield better returns than SIPs.
Gaikwad’s loss of Rs 5.76 lakh is not inconsequential, even in comparison to the Rs 5.6 crore corpus that he stands to make if his investments earn him a compounded return of 15 per cent a year for 30 years. However, this loss of 1 per cent of the end corpus is because he failed to make a single payment over a 30-year period.
Also, this loss has been incurred because he missed payment in the initial years of his tenure. If he done so in the 26th year or 301st instalment, he would have lost only Rs 20,114 since the power of compounding works best over a long period of time.
