Did you know that there are more than 2 crore SIP folios in India and these SIPs (predominantly equity mutual fund SIPs) are contributing nearly Rs.7200 crore (more than $1.1 billion) of inflows each month. Effectively, the retail investors are indirectly participating in the equity markets in a very big way. But an SIP is not just about starting off just any equity fund and sticking to it. There has to be a calibrated strategy for the same. Here is how you can go about it…
- SIPs work in the long term; in fact the very long term…
Equity funds generate the best returns over the long term. In fact, the return non-cyclicality will almost reduce the risk to a negligible level. Mutual fund SIPs work best when designed around equity funds so you are talking about the very long term. Take a minimum time frame of 8-10 years as that will enable your equity fund to automatically smoothen out the vagaries of the equity market.
- You need to tag a goal to each SIP…
You have a SIP, you have equity exposure, you have a long term view and you have discipline. What is missing in the picture? You are actually missing out on purpose. Your SIPs need to be tied to goals if they are to be meaningful. Discipline comes from tying your SIP to a long term goal like retirement, child’s education, child’s wedding etc. That will give you clarity in SIP expectations. You can tag multiple SIPs to a single; that is perfectly fine. But random additions of SIPs are a strict “No”.
- The SIP must match and also reflect your risk appetite and your risk capacity
You cannot design your SIP without considering your risk parameters. What do we mean by risk parameters? The key is aligning your SIP maturity to your goals. Goals could either be short term, medium term or long term. If you are doing a SIP to pay your home loan margin after 3 years, you cannot rely on equities. Your SIP should be either in debt funds or perhaps even a shorter term fund. If the tenure is still shorter then you must rely on a liquid fund or a liquid plus fund. Even within equity funds, sectoral funds and thematic funds are best avoided. Stick to diversified equity funds. Other classes of funds within equities can, at best be looked at for short term opportunities.
- Fund selection is the key to your SIP performance in the long term…
To begin with, you need a stringent framework to select funds for your SIP. Firstly, look at the pedigree, quality, performance and the AUM of the fund. Now you have an assurance that the funds are here for the long haul. Avoid a fund where the fund management team is in a constant state of flux. The longer the team stays together, the more consistent is the investment policy and investment philosophy. Tweak the way you look at performance while selecting funds. Firstly look at consistency of performance. Secondly, focus on the total returns index (TRI) rather than absolute returns. Lastly, focus on risk adjusted returns by using measures like Sharpe and Treynor.
- Keep checking if you are doing better than an index fund SIP
This is also referred to as benchmarking? You invest in a SIP to get the benefits of active fund management. If you are only going to earn index returns, you are better off taking lower risk in an index fund. Your equity SIP has to outperform the index fund SIP by a reasonable margin to be really justified. Short term fluctuations in returns are understandable, but long term outperformance over an index fund is the justification for your equity fund SIP.
- In SIPs, time matters more than timing
The question is whether you should increase your SIP amount when markets are down and decrease your SIP amount when markets are up? Frankly, that is not advisable. Firstly, nobody has been able to catch the tops and the bottoms of the market. Secondly, incremental benefit of timing the market is very minimal over a longer period of time so it is waster effort from your side. Lastly, the whole idea of equity SIP is to focus on time rather than timing. Why try and change the script in the first place?
Equity SIP has a strategy element although it is a fairly disciplined and routine exercise. It is about carefully selecting and monitoring the performance of your SIP. Remember, the SIP must fit into your overall financial plan and it should be tied to a specific goal. That gives purpose and direction to your SIP. SIPs are great instruments of wealth creation. With a little bit of smart planning, they can go a long way in help you meet your goals.
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