How to set right your SIP portfolio

However, if one looks at aggregate data, it's apparent there's one clear path to financial nirvana – SIPs, or systematic investment plans. And more SIPs. And then some more!

Actually, there’s another as well, options trading. Today, however, we will focus on SIPs.

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What I am attempting to share today are some broad thoughts on how to optimize your SIP portfolio. Consider it a baby step towards a more potent approach to generating wealth – sensible asset allocation. Let's get started. To keep things simple, our discussion is limited to the equity component of your wealth.

First and foremost, you need to clean house. When investing in mutual funds, the more schemes you own, the closer your returns will be to the market average. So, the first step is to select the right scheme(s) and direct all your money (SIPs) into those. This also means stopping your SIPs and getting rid of all the schemes you should not have invested in initially. Your distributor won't approve of this one bit!

Second, you are free to start as many SIPs as you wish, as long as all of them direct your money to the same one or two carefully selected equity fund schemes. So, more money leads to more SIPs, which does NOT lead to more equity schemes in your portfolio. Simple.

Third, avoid the urge to add new mutual fund schemes to your portfolio like the plague. In other words, avoid reverting to old investment habits. Stop adding SIPs to tap into every new opportunity that comes along. The fund manager of your carefully selected schemes is probably evaluating the new opportunities anyway.

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That's it. These three ideas, if followed well, should give you a leg up in your quest to generate long-term wealth.

Related to this, there are two other points you need to keep in mind.

First, make the most of market sell-offs. Second, ensure that you own the right equity schemes for you over time.

Let's start with investing during market sell-offs. Given our recent history, we know that sell-offs are short and sharp. If, and that's a big IF, this trend persists, then monthly SIPs are unsuitable for the topping-up opportunity that such sell-offs present. 

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Here you will need to be more hands-on to make the most of the opportunity. Just make sure you don't go finding a "new" fund to invest in! 

Ensuring you are invested in the right funds at all times is more complicated. It's a fact that all funds underperform at some time or another. You need to consider whether, over the long period you plan to invest, the fund has the potential to deliver what it aims to. This need not be the highest return in the market, but perhaps a less volatile yet solid performance over time.

Basically, is the fund sticking to what it promised to do? As long as betting on the fund management team makes sense, stick to the fund. Give them a long rope during times of underperformance. The probability that a solid fund management team will deliver in the long term is good!

SIPs are a great, but not perfect, way to channel your savings into the market. Coupled with the right selection of one or two funds, it could end up being a great investment over time.

Having said that, remember, ultimately you need to get your asset allocation right if you want to achieve your long-term wealth creation goals. Getting your SIP portfolio right is just a baby step in that direction.

Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.

You should always consult your personal investment advisor/wealth manager before making any decisions.

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