I recently mentioned in a talk that many three-letter acronyms introduced by the MF industry are unnecessary. Allow me to expound.
The three-letter acronyms (TLAs), aka initialisms, I mean, are SIP, STP, SWP and SIF. We can also include the associated products – PMS and AIFs.
SIP: You need a system to start investing. You do not need a SIP to invest in MFs. The minimum investment without a SIP is Rs. 1000 to Rs. 5000. Most people who read this should invest much more per month. You don’t need SIPs. Push yourself to invest more and more each month. That is how you build wealth.
SIP is an automated way to buy units on the same day each month or quarter. Some people mistakenly opt for a weekly or daily SIP. There is no extra benefit in doing so.
A SIP will not make you disciplined. You have to build that on your own. A SIP ensures the AMCs generate profits even if you forget to invest monthly, which is why they like to sell the “discipline” bit.
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You can invest manually online each month in less than a minute. If you don’t have the discipline to do this, you don’t deserve wealth.
Yes, there is nothing wrong with an SIP, and you can choose it. But there is nothing wrong with investing manually, either. I recommend manual investments with aggressive increases in the amount you invest each year or month, and meticulous tracking of your investments. That is how you build wealth, not by starting a SIP for a small amount to clear your conscience.
Also, see: Myth Busted: SIPs do not reduce risk or enhance returns!
2. STP is a way in which a large amount is transferred from a less volatile asset to a more volatile asset. Typically, it goes from a liquid or arbitrage fund to an equity fund. AMCs promote STPs because they can lock in AUM (the lump sum) in their funds.
This is also not necessary. If you have a lump sum, manually invest a small amount each week or month and deploy it over a few months. Drawing this out will not provide any benefit!
Read more: Investing a lump sum in one-shot vs gradually (STP) in an equity mutual fund (backtest results)
3. SWP is aggressively marketed to draw regular income from a mutual fund while the rest of the corpus grows regularly. While setting up a SWP from a liquid fund, arbitrage fund, or money market fund is okay, avoid SWPs from equity funds, balanced advantage funds, aggressive hybrid funds, etc.
This is because if the NAV is volatile and does not move up for several months, more and more of the corpus will be depleted. Do not take those SWP backtests seriously. It will not be easy to handle such a time in retirement, especially when you do not have much of a corpus to work with.
You can invest some of your assets (if viable) in equity or equity-oriented hybrid funds after retirement. But you don’t need to use them as a regular income source. Redeem from them whenever you want for discretionary expenses and use safer assets for regular income.
SIF: SIFs are supposed to fill the “gap” between MFs and a PMS (with a minimum Rs. 10L ticket). It would be a perfect marriage between product manufacturers eager to launch fancy products for a fancy fee and investors who feel they have arrived at the “next level” and want “diversification” with new “opportunities” (read: unfamiliar risks) without ever understanding that complexity and clutter only lead to diworsification.
Portfolio composition of SIFs: Flexible strategies include equity long-short, debt long-short, hybrid, sector rotation, thematic, and dynamic/tactical asset allocation; they can invest in gold, real estate, infrastructure, REITs, and private assets; and, as mentioned above, up to 25% of NAV in exchange-traded derivatives for non-hedging purposes. The taxation is like mutual funds. They can invest in equities, bonds, commodities, REITs, private assets, gold, real estate, and infrastructure.
The financial industry has a simple mantra. Attract high-net-worth clients by offering them opportunities for higher returns. Most of the time, these clients believe they have achieved a higher standard of living and invest without fully appreciating the associated risks. The industry promotes the idea that wealthy individuals must take on more risk to diversify and grow their wealth.
The simple fact is that investors don’t need to take on increasingly higher risks just because they can afford to (emotionally, it’s another matter). High risks always come with multiple unknowns. Since most investors do not bother to read about the risks, they are likely to be disappointed when things turn sour.
For the same reasons, AIF (alternative investment funds – min Rs. 1 Crore) and PMS (min Rs. 50 lakhs) are also eminently unnecessary.