Why Most Advisors Advise To Invest Through SIPs Not Lump-Sum?

Oct 11, 2018 10:30 IST 3344 views

Mutual fund advisors and even financial advisors, in general, are increasingly advising their clients to invest in mutual funds through SIPs rather than through lump-sum investments. In fact, the SIP contribution by retail investors alone has crossed $1.2 billion on a monthly basis. That is a far cry from the situation 4 years back when investors hardly understood the importance of the SIP. It was a long haul explaining the merits of a SIP but finally, we have reached a stage where SIPs are on auto mode. Here are 8 reasons why advisors are suggesting investors opt for the SIP method of investing over lump-sum method.

Why Advisors Are Asking Investors To Opt For The SIP Method

  • It is very easy to explain and to understand. If you look at it, the concept of SIP is simple. You take some money out of your regular income and put it in a productive asset. Over a period of time, it grows so large that it can take care of your long-term needs like retirement, children's education etc. The whole concept is quite simple and very appealing because it deals with real-world problems that every individual is up against.
  • It synchronizes with the income flows. That is what makes SIP attractive to the investor and the advisor. The investors do not have to worry about writing cheques as each month a small portion of income goes towards long-term wealth. For the advisor, once the SIP is registered there is little to worry about continuance. After all, nobody wants to be lax with emotional goals like retirement, a child's future etc.
  • Wealth creation is all about discipline and this is discipline in auto mode. Discipline is what SIP achieves. It ensures that you are compelled to save by default and adjust your budgets accordingly. The advisor does not have to keep explaining the virtues of discipline and regular investing to the investors on a regular basis. It literally happens on auto mode and the wealth creation is automatic over the long run.
  • It has given results and that can be demonstrated. Demonstrating results of the power of SIPs is quite simple. Today most websites include a SIP calculator. You can also go to any mutual fund website and do a fund specific calculation of the SIP impact. You straight away get to see the wealth created vis-à-vis your contribution and how the wealth ratio gets a boost in the long run. Customers are able to see the merits of SIP when it is actually demonstrated to them.
  • SIPs are aligned to achieving goals and give direction. This is increasingly becoming the in-thing among investors. Not only are investors becoming conscious of the need to plan their finances, but they also understand that it is possible with a small sized SIP provided you keep discipline and regularity. All you need to do is to identify your long-term goal and then tag a SIP to the goal. It is as simple as that!
  • Regular investing is a product Indians are familiar with. You will be surprised but Indians have been regular investors for a very long time. Products like bank recurring deposits (RDs), monthly chit funds, post office RDs have all been popular for a very long time. Women have been buying gold in tranches for a very long time. The concept of SIP is nothing new. When they see the potency of SIP in wealth creation, the buy-in is quick and also a logical extension.
  • Risk of equities gets spread. Indian investors are now realizing that investment is not just about returns but also about risk. In fact, it is a lot more about risk since that is what you can control. If you manage your risk then returns will be automatically taken care of. It is very easy for the advisors to demonstrate how SIP spreads your risk through the power of rupee cost averaging. Such concepts become much easier to drive home.
  • It helps them build a long-term relationship with the client. Financial services business has changed drastically in the last few years. Firstly, selling is secondary and advice is primary today. The SIP allows advisors to position themselves appropriately to clients. Secondly, the focus is not on a number of clients but on client wallet share. SIP helps advisors to build a long-term relationship with clients. This is eventually beneficial to both the investor and the advisor.

Advisors are increasingly realizing that lump-sum investments are not a sustainable approach for investors. Regular investing is disciplined and is the answer to wealth creation. SIPs just fit the bill better!

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