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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Give a fillip to your systematic investment plans

SIP is a method of investing; it is not an investment product

Systematic investment plans (SIPs) have become the preferred way of investing in mutual funds (MFs). The advantages of SIPs are manifold: low initial investment, convenience, disciplined investing, and cost averaging. For distributors and advisers also, it is an easier sell. No wonder that SIP accounts crossed the 10 million mark in April 2016, up from around 6 million in March 2014.

But is SIP the holy grail of investing? Maybe not. For one, it is a static method of investing—the investment amount remains fixed irrespective of your income and market levels. Unfortunately, unlike the Employees’ Provident Fund (EPF), SIPs cannot be linked to a percentage of your salary. Therefore, over the longer term, you could be underinvesting even as your salary or income grows but the SIP amount remains the same. Some asset management companies (AMCs) offer top-up facility in SIPs, but the top-up amount is fixed and cannot be altered.

The shortfall will be more acute in longer term SIPs which are of more than 24 months. The normal strategy then is to start another SIP in the “hot" new fund of the time. But in doing so, you could end up accumulating a portfolio of SIPs; all unrelated to each other. As a fund house’s chief executive officer pointed out to me recently, if you own more than 4-5 equity funds, you end up owning almost the whole market, and your portfolio tends to underperform the market (after fees and expenses).

Asset allocation can also get distorted over time, even if you start with the right mix in equity and debt funds. If the share of equity rises in the portfolio due to a rising stock market and you keep investing the same amounts, the portfolio will get skewed towards equity, thus increasing the volatility of the portfolio. It is important to maintain asset allocation within the desired band. Studies have shown (Brinson, Hood and Beebower, 1986, Determinants of portfolio performance; later substantiated by other studies) that asset allocation can account for almost 90% of a portfolio’s performance.

Some online platforms offer flexi SIPs wherein you can alter the amount invested subject to a floor and cap. But again, you or your adviser will need to monitor the portfolio periodically and keep changing the invested amount every month. Systematic transfer plans (STP) or Systematic withdrawal plans (SWP) can also be used to rebalance the portfolio. STPs allow you to switch from one fund to another at a predetermined time, while SWP is the reverse of SIP—it allows fixed redemptions periodically.

Regular reviews for course correction

A periodic review with your adviser or on your own can help significantly. All performance metrics have to be looked at from a portfolio level. Many investors will be satisfied to own the top performing fund, even though the portfolio returns might be poor. The reverse is also true, i.e., a poorly performing fund will raise eyebrows, even though the overall portfolio performance is good.

It is a good practice to note down the rationale for buying a particular fund. And until the rationale or assumptions change, chopping and churning the portfolio might not be a good idea.

Goal-based investing has become popular in the recent past. In this you invest with specific financial goals in mind. Volatile markets, can, however, force you to modify your assumptions and change the investment amount or the mix. A periodic review process can help alter course at the right time.

There is also the perception that SIPs give higher returns than lump sum investing. Evidence is to the contrary; especially over long periods. As markets tend to rise over the longer term, investing through SIPs implies that you are buying at higher and higher prices, thus reducing your return versus lump sum investing. Rupee cost averaging (another word for SIP) works better in falling markets. So, do not pause or cancel your SIP if the market is falling. The real boost to portfolio performance comes when you invest consistently in a falling market, i.e., you buy more as stocks get cheaper.

How do you get the maximum out of your SIPs then? Well, don’t sleep over them. SIP is a method of investing; it is not an investment product. Think of it as a means of disciplining the investment process, a kind of reverse equated monthly instalment (EMI), which enforces the saving habit.

To give a fillip to your SIPs, make sure the amount invested grows broadly in line with your income, asset allocation is maintained and you are on track with your assumptions if investing for a goal.

Atul Rastogi is an investment adviser and founder, Ardawealth.com

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