Photo: iStock
Photo: iStock

Q&A: There is no bad time to start investing systematically over a long term

When investing in systematic plans, the risk of market-related timing is low and evens out over the long term

I want to start systematic investment plans (SIP) to save for the education of my 2-year-old son and my retirement. With the market at such high levels, is it okay to start investing in equity? Should I go for an agent, or buy direct plans?  —Animesh Shah

If you are planning to invest systematically and for the long term, then there is no bad time to start investing. Only investors who are trying to make bulk, one-time investments need to worry about whether they are investing in a market high. For SIPs, where investing happens in monthly instalments, the risk of timing is low and evens out over the long term. Since your son is only 2 now, you will be investing for at least the next 10-15 years for his education. Hence, you can invest in a portfolio that is equity-heavy for a high compounding growth rate. I would suggest investing 80% of your monthly allocation into equity and the rest in debt.

As somebody who is just starting out, it would be better to go for an adviser. You would need the adviser not just for setting up your portfolio in the beginning, but also to ensure that it remains in good health over the years.

I have been investing in equity mutual funds for the last seven years for my child’s education. I will need the money after seven years when my child finishes Class XII. Recently, the markets rose and my portfolio made gains. Should I shift some of these equity investments into debt or liquid funds to lock my gains? Or is it too early?

—Sundar Babu

Since you say that you are investing in equity funds, I am assuming that your portfolio is 100% into such funds. You can consider launching into a 7-year plan at this time and evaluate your options. If you were creating a plan for 7 years now, you would likely create a portfolio that is 70% in equity and 30% in debt. So, you can modify your portfolio that would get you to such an asset allocation. If you had originally invested in such an asset allocated portfolio, you would consider this a “rebalancing" exercise. Rebalancing is the best way to book profits without employing market timing-related judgement calls. So you can take 30% of your portfolio (evenly from the different schemes that you are holding) and move them to a couple of short-term debt funds. You can continue your SIPs (in both equity and debt funds) going forward.

As you get closer to your goal, say when it’s only 2 years away, you can rebalance the asset reallocation to move your investments in safer debt funds.

Some funds offer life insurance if you start an SIP with them. Do such schemes make sense?

—Sonal Malhotra

It is true that a handful of mutual fund companies—especially those that have sibling concerns that offer insurance—offer a cover for people who opt for it while doing SIPs in select schemes. Typically, these covers have a maximum limit of Rs25 lakh or so. The cover will be proportional to the amount of your SIP (subject to the maximum limit). For example, Birla Sunlife’s Century SIP offers coverage of 100 times the SIP amount starting the third year of the SIP.

But such coverage is valid and active only as long as the SIP is valid and active (without missing payments). There are no additional charges as these help the company ensure customers continue the SIP.

Investors opting for such offers should not choose a scheme based on this criteria alone; a scheme for investment should be chosen for its merit. They should also look at the coverage as augmentation to the primary life cover in the form of a term cover and not as a replacement for it.

But if such a scheme motivates a person to stick with their SIP, all the better.

Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com

Queries and views at mintmoney@livemint.com

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