SENSEX NIFTY
Oct 22, 2012, 10.48 AM IST | Source: CNBC-TV18

Why should you prefer SIP in equity funds?

Hemant Rustagi of Wiseinvest Advisors believes that mutual funds offer much more than what equity funds have to offer.

Hemant Rustagi of Wiseinvest Advisors believes that mutual funds offer much more than what equity funds. "Investors needs to really also understand that SIP is actually a mechanism that encourages investor to not only follow a disciplined approach, but also it inculcates regular saving habit," he told CNBC-TV18 in an interview.

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Below is the verbatim transcript of the interview

Q: It is generally believed that investors benefit from the systematic investment route or the SIP only when they do it in equity or balanced funds. So, generally when someone wants to invest in equity fund - that’s when they think of SIPs. Considering the fact that MF’s actually have started offering a variety of debt funds as well, does it make sense for investors to use this SIP route even for debt MFs? How does it compare versus investing in your usual bank recurring deposit?

A: I think most investors, when they invest through SIP opt for equity and balanced fund. I would say, over the last couple of years, even the gold funds have become a preferred option. But the reason why there has been focus on equity fund/balanced fund are basically for two reasons. One is systematic investment plan or systematic investing or a disciplined approach is considered to be the best way to tackle the volatility that exists in the marketplace every now and then. The second is, all those investors who invest in equity as an asset class over the long-term to achieve large targets that they have for these goals opt for equity oriented funds. As they do not have a lump sum to invest, they want to actually accumulate the corpus over a period of time and that is why they opt for SIP.

But if you really analyze their experiences from this, it has been actually a mixed experience. The reason for that is that many investors start investing in these funds either without a defined time horizon or invest for the short-term. Typically, every time the market goes down, we see lot of investors stopping their SIP. That I think is a clear indication that they do not really realize the fact that equity investment is for the long-term and they need to continue.

So, I think the time has come for them to realize that the mutual funds offer much more than equity funds. There are a variety of debt funds which are available. There is ultra short-term debt fund. There is short-term debt fund. There is income fund. There are debt oriented hybrid funds also. Investors needs to really also understand that SIP is actually a mechanism that encourages investor to not only follow a disciplined approach, but also it inculcates regular saving habit. Therefore, the fund selection clearly has to be dependent on the time horizon that investor has on hand and also basically what is the objective that he wants to achieve. I believe that if you were to compare traditional options like recurring deposit with these short-term, ultra short-term or income funds, not only these options have potential to give better returns, but also the returns are more tax efficient. Yes, in the traditional options you get guaranteed returns, but normally the returns are low. Also, because you are not tax efficient the post-tax returns are very low.

We can understand by we have an example. If an investor in the highest tax bracket of 30 percent gets 9 percent from an recurring deposit, his post-tax return is going to be only 6.3 percent, whereas the same money if he gets in ultra short-term fund, because the long-term capital gain is taxed at 10 percent he will end up getting 8.10 percent and if he claims indexation it will be even higher. You can clearly see that if investors can move away from the fact that they want only guaranteed return, they actually can give themselves a chance to get better returns and also more tax efficient returns.

Q Expense Ratio is not of utmost importance for:
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