A discussion on the pros and cons of a manual systematic investment plan (MSIP), instead of setting of automating it with an ECS bank mandate. I have been practising the MSIP for a few years now and when the topic was broached recently at FB group, Asan Ideas for Wealth, I thought I will list the pros and cons of manual systematic investing.
Thanks to efficient industry driven propaganda, many think of the SIP as the only way to invest in mutual funds. In fact, many believe that SIP is a type of financial instrument without realizing that it is nothing but automated monthly purchase of mutual fund units. Not many people understand that each unit purchased is independent and subject to the same exit load, taxation and lock-in (if any) as per scheme rules. Thanks again to the propaganda, the SIP is considered as an instrument that forces discipline, which I find quite amusing.
The SIP works on the basis of inertia. Newton said that an moving object will keep moving unless disturbed. The same applies to objects at rest. So SIP works for those who are not organised enough to invest manually and who would leave alone a running SIP because it is too much trouble to stop it. Not everyone need use an SIP.
There is nothing special about an SIP and there is nothing special about investing manually each month (MSIP). No big difference in performance can be expected between an SIP and MSIP. So an MSIP is not for getting more returns. Also, both represent systematic investing. Meaning, the investible surplus available each month (for salaried) is invested without fail, regardless of market conditions.
This post is not a recommendation for MSIP but only a discussion about pros and cons, which every investment strategy would have. Please evaluate your needs before considering either option.
Let us start with the disadvantages of an MSIP, just to emphasise that I am doing my best to be level-headed about this.
Arguments in opposition to an MSIP
1. Convenience. In this day and age, people cannot spend less than a minute to manually purchase units, once a month. Not being sarcastic. Just acknowledging that it takes all kinds to make the world. So, an automated option helps. Rain or shine, some amount is getting invested. To use propaganda parlance, SIP enforces discipline (not to the individual, but to cash flow from the bank account).
With MSIP, some instalments may get missed if the individual is not organised enough.
2. Avoid the temptation to time the market. With a SIP, units are purchased on a particular day each month, regardless of market position. In an earlier study, SIP vs SI-PE (investing made on market PE), it was shown that the difference in XIRR between the two strategies is too small for concern. Verdict: SIP is an awesome way to get more than decent returns. Read more: Are Mutual Fund SIPs Suitable for Disciplined Long-Term Investors?
If one invests manually, there is a temptation to time the market. Most people do not know how to value the market. If the market is at an all-time high, they assume that valuations are high and it is a wrong time to invest. So the MSIP practised by a person who has no conviction in systematic investing can cause more harm than good.
3. Automation helps if unable to invest. Suppose I get sick or too occupied (work, emotionally etc.) and give up on manual investing, someone else (spouse) has to invest in my place or at least remind me to invest. Not a good idea to depend on this?
4. One may buy randomly. If one has the freedom to buy units from any fund, there is a possibility of random buying resulting in a cluttered portfolio.
Arguments in favour of an MSIP
1. Works well with goal-based investing. Most investors cannot invest a fixed amount for a goal from day one. They need to start small and increase the investment amount each year. Meaning, after one year the SIP needs to be ‘stepped-up’. If interested, have a look at the Step Up SIP Return Calculator.
Even if the AMC offers a step-up option, one needs to remember to use it. So complete automation is not possible.
The MSIP allows the freedom to increase the investment amount at will each year.
2. Why should I marry myself with a mutual fund? Many ask, “suggest a mutual fund for a 15-year SIP”. One cannot blindly keep investing in a mutual fund for that long, without reviewing performance. Many in the financial services industry believe mutual funds must be reviewed each year and changed if necessary (I don’t agree). Then an SIP is not the automatic choice! MSIP is.
That said, funds should not changed often and never because their star rating has decreased.
3. MSIP aids uncertain cash flow situations. Sometimes, monthly expenses can swing wildly (ask any person taking care of bed-ridden patients). In such a case, locking a significant portion of the salary in SIPs is not a prudent idea. MSIP allows the flexibility to change the investment amount too. Of course, this requires the discipline to track the investment and execute course corrections.
This, along with pt 1, are the main reasons I prefer the MSIP. I do my best to invest more than my monthly expenses. This amount can vary each month. So I prefer to invest, what I can, manually and when I can.
Sometimes if the SIP is running, people let it be and do not top it up with a manual investment, even if they can.
4. Complete portfolio control. I started with a cluttered portfolio. MSIP allowed me to change the amounts I invest in each fund. Although I may have 7/8 funds, the amount in 2/3 of them are too small for concern. It is not about number of funds in a portfolio, but their weights in a portfolio. I can change my investment amount each month among existing funds in the hope that the net XIRR of the portfolio increases. Read more: How to review your mutual fund portfolio This requires conviction and perhaps some experience.
Suggest investors who are new to mutual fund investing stick to an SIP before considering an MSIP. MSIP is not for investors who need their choices to be ratified by others.
For investors who understand what they are doing, manual investing can also be used for taking tactical decisions. It would however not be an MSIP then! For example,
(a) invest more in a balanced fund which holds long-term gilts to benefit from rate movements (the periodic rebalancing would help preserve some gains)
(b) increase or decrease exposure to mid and small cap funds depending on market conditions.
(c) Change the equity:fixed income investment ratio for periodic or tactical rebalancing. Read more about rebalancing techniques: The What, Why, How and When of Portfolio Rebalancing With Calculators to Boot
Read more about MSIP rebalancing in the last section of this post: Are Mutual Fund SIPs Suitable for Disciplined Long-Term Investors?
When I started out with a MSIP, I was new to equity investing. So I had to force myself to accept the volatility by investing on dips. So each month, I would wait for a 1-2% dip in the first 15 days of a month. If there is one, I would invest. If there is no such dip, I would invest by the 15th. For the last 1.5 years, I have abandoned this method. Now I invest whenever I have enough money in the bank. All investments are religiously tracked with this: Monthly Financial Tracker. I do my best to ensure the annual investment quota is met by the end of the year.
If you are barely able to invest each month, because of expenses and/or liabilities (home loan), then stick to a SIP at least until you have enough investible surplus. MSIP works best only for those investors who enjoy investing as much as possible each month.
This is as far as my thinking takes me on this matter. I would like to reiterate that this is not a recommendation for MSIP. It is only a discussion of pros and cons. Do evaluate your needs before opting for any investment strategy. The MSIP is not a technique to get more returns.