As economic analyst and financial advisor as well as client I find that now day’s products are not miss-sold but the underline concept of investment pitch is not very clearly understood by the financial advisors or IFA. There is thin line of difference between lumsum and SIP and diversification of risk.  Selling of financial products is gone now. It’s the time of selling or rather designing the strategy of investment in some place.

In the month of December 2018, the industry has added just 1.87 lakh net new SIP accounts, shows a recent AMFI report. Compared to April 2018, the net SIPs declined by 61% to fall to 1.87 lakh in December 2018 from 4.81 lakh in April 2018. Even if we compare to November, the net SIP registrations fell by 39% in December.

The point is we need to know why these situations come up and where the advice of SIP or STP went wrong?

One should know that SIP/STP and lumsum has different objective for investments and they both cannot be replaced. Well advisors have done this replacement in 2015-2017 and hence we are now we are burning the finger through SIP cancellation.  

Now the biggest task for IFA is that he has to now convince the client where the investment strategy did went wrong. The run up of the market in 2017 was not taken properly for advising doing lumsum investments. SIP is not meant for every market and Rebalancing is an art which cannot be ignore.  Diversification of assets and risk does not mean every time every investments have to be SIP or STP.
Analyzing the financial requirement and objective of investments is the key for financial advisory. Even for a distributor or IFA one needs to know the thin line of difference between the timing of ASIP/STP and Lumsum investments.

When markets fall one should do lumsum based on the objective of investments. SIP or STP is for long term game where a specified goal which needs to be achieved in the next 10 or 15 years, SIP plays its game. But where the investment is just for making quick gain and in those markets where we get rally like 2017 one should explain clearly the investor about the risk. Before one jumps into rough SIP one should be clear that only risk diversification of lumsum investment into SIP may not be the sole objective of investment by the client.

We hardly ask the question to the client about the objective of investments.  We pitch the clients that markets are strong and it has huge growth hence start your investments. The client looks through the market numbers and takes the decision of investing in Equity MF by redeeming his FD investments under the objective of getting 12% return (which is higher than FD rate of interest of (8% to 9%). 

This simple math’s behind the clients mind instigates him to do investments and the distributors just simply adds a value proposition tip of diversification and gets the investments in STP or SIP format. This is the place where the mistake of investments happens and after 2 or 3 years  the client simply stops the investments.

Re balancing, well it’s not redemption but a different concept of protecting the gains form one investment and creating wealth for the client. This has not been done in the last couple of years. Ignorance is the mother of all evil. One needs to check in that when a desired objective is achieved one should re-balance the investments. 

But the mistake while starting the investment was that we were not clear from the client side as well as from our side about the objective of investments. Understanding the purpose of investment saves us from loss of client and his money.