Kalpen Parekh, MD and CEO of DSP Mutual Fund, has been in the fund management business for about three decades. At an event of Trustedarms Wealth Management, a mutual fund distributor, he highlighted how SIP or systematic investment plans can be a powerful tool for retail investors to accumulate wealth. In this context he cited an example. Parekh said the he once discussed SIPs with a billionaire. The billionaire replied that “SIPs are not for me; they are for my driver.”

Challenging the billionaire's thinking, DSP MF boss asked the billionaire to take out his investment statement for the last 20 years, telling the billionaire that his returns should definitely be lower than his driver's.

"Unfortunately, the driver was born into modest circumstances and therefore did not have much wealth to invest. However, his rate of return was about 1.6 times higher than that of the billionaire. The reason is simple: wealthy people often seek complex investment ideas and tend to overlook disciplined approaches like SIPs. Yet SIPs are a universal concept that works for everyone," Parekh said.

To further illustrate the benefits of SIPs for retail investors, Parekh said that if you compare lump-sum returns and SIP returns across countries, you will find that in nearly 80% of countries, SIP returns are equal to or better than market returns.

He cited another example from Indian markets. Between 2008 and 2014, the Indian stock market delivered virtually zero returns. However, an investor who had continued investing through SIPs during that period would have earned approximately 8% annualized positive returns, Parekh said.

Why do SIPs work?

When markets fall, the Net Asset Value (NAV) of an equity mutual fund goes down. And when NAV falls, the number of units you can buy goes up. In other words, a bear market is actually a bull market for accumulating units, Parekh said.


There are two kinds of investors, according to Parekh. Those who focus on rising NAVs and those who focus on accumulating more units. Long-term winners are the ones focused on accumulating units and they actually welcome market declines because they can buy more at lower NAV prices, he said, adding that real wealth is built by investing during bear markets and then allowing bull markets to reward that patience.

Dhirendra Kumar of Value Research in a podcast in reply to a query from an investor about market timing said markets are very unpredictable and timing it perfectly is very difficult. A mutual fund investor had asked if instead of doing an SIP on 10th of every month, should he keep the cash ready and and buy mutual fund every time the market falls.

"I have seen all the kinds of fund managers who have attempted it with their many allocation funds over many many years to time it and they have not succeeded even in a broad way, forget about in a narrow way." Dhirendra Kumar said.


One should get over the instinct of timing the market perfectly, Mr Kumar said, citing data. "Let me give you an
illustration based on a real number based on 25 years of data. We made one assumption that we have been able to find a person who is a gold medalist in market timing. He does invest some money every month but he has a great knack for picking the day which happens to be the lowest NAV value of the month. On the other hand, there was another person who was Mr. Unlucky. He invested in the same fund at the peak NAV of every month, the highest value of the month and he chose that day for 25 years. The difference in return in XIRR of the gold medalist in market timing and Mr Unlucky is less than 1%. "