How systematic are your SIPs?

Mutual Funds and especially the Systematic Investment Plan (SIP) approach have emerged as the fad of investing in recent times. The SIPs are safe and convenient means of investing in a bid for wealth creation or a corpus creating. SIP also offers you immunity from the Market volatility owing to various global and domestic factors. MFs also outscores the traditional investment avenues such as FDs, PPF, Post Office Schemes etc. and also is a better financial weapon w.r.t conventional tools in your fight with inflation.

Identify Goals

All of the above statements are correct about MF and SIPs but when the SIP is aimed for corpus or wealth creation, the next question which comes to mind is purpose/goal for wealth creation. With so many advisory avenues such as TV Channels, Financial Magazines and Newspapers, people choose candidates for MF investments and on most occasions it is chosen without any predefined goal.

The SIP(s) needs to be backed with goals and these goal in turn could be a – short, medium or long term goal. The goals can have varieties ranging from car purchase, foreign holiday, child education to a retirement planning. One should be mindful of the fact that Equity MF SIP is not a universal solution for every goal. Equity SIPs are preferred for long term goals and exposure to equity is decided depending on the tenure of the goal and risk profile of an investor.

Don’t mix up Investments

The right candidates should be selected for different goals after a thorough analysis or after a consultation from the financial adviser. The SIP(s) should be demarcated clearly for each goal which facilitates easy tracking of the performance. A fund might be concurrently an investment candidate for more than one financial goal. The apt approach is to separately invest in the same fund as per their contribution to different goals. This will help in performance evaluation of the investments w.r.t a goal and rebalancing the same on a case to case basis.

Case: Fund A might be part of 3 goals X, Y  and Z for the time horizon 5,7 and 9 years respectively. In a performance evaluation “A” might not be a good fit for goal “X” now but still continues to be an ideal candidate for goal Y and Z. Thus it makes sense that investment in “A” should be spread into three chunks as per the contribution in goals X, Y and Z so as to reshuffle “A” with a better fund.

Stay invested

Many investors stop or terminate their SIPs when the markets go down. On the contrary, the SIPs can be supplemented with additional investments in the bear market situation if the saving’s basket allows you to do so. The SIP and additional investment in a market slump will deliver good returns as it facilitates the investors to buy more units at a lower price. This will eventually help in meeting financial goals effectively with more unit purchases at a relatively lower NAV. The portfolio rebalancing approach still needs to be followed to identify any duds in the portfolio.

Step up a Yearly SIP

The SIPs facilitate investment of a fixed sum every month but the SIP amount should also increase as the one’s income rises which in turn increases your savings. Ideally, the SIP should also increase in the same proportion at which the income grows up. These step-up SIPs can play a tremendous impact in attain the financial goals especially the long term goals

Are you over diversifying?

To attain a financial goal, one should focus on 3-4 well diversified funds which will aid in reaching the desired financial milestone. If one is investing in too many funds, it may lead to a situation of over-diversification which defeats the purpose.

The over diversification can due to various factors and some of the symptoms of this disorder in the MF portfolio can be

Ø  Investment in too many mutual funds with any single investment style category

Ø  Owning a MF that is subsequently investing in too many stocks (Ideally a Mutual Fund invests in 20-25 stocks)

Ø  Owning an exorbitant number of individual stock positions  through different MFs

Ø  Investing in different MFs across industries but they share the same characteristics such as defensives (Pharma, FMCG) which tend to perform weak in a booming market

Monitor and Track Progress

After all is said and done, the MFs engaged in targeting the financial goals should be analysed intermittently but definitely not on a daily basis. After all the trust and believing, these funds needs to be evaluated with it’s peers and the benchmarks indices. The investment style variations, fund manager changes, industry patterns also play an important role in driving the fund performance. Thus, they need to be evaluated on these parameters as well. 

Overall, SIP is one of the best techniques to bear the fruits of both market downturn and uptrend. But SIPs should be targeted for specific goals and not vague goals such as wealth creation. If one invests a fixed amount every month it would not only reap benefits of a market crash but would also smartly reach the targeted financial milestones.

Originally Published on Finalaya.com