Systematic Investment Plan (SIP) is nothing but small amount of money invested on a pre-set date every month into specific mutual fund/funds. One of the best ways of entering equity market is through Systematic Investment Plans (SIPs) in equity mutual funds, as it brings in an investment discipline for the investor. SIPs help to achieve financial goals by investing small sums of money on a monthly basis that eventually leads to accumulating the required corpus for reaching the goal.
A Systematic Investment Plan is very useful to invest in today’s highly volatile market. These kinds of plans are traditionally offered by Mutual Fund houses for small investors to start their investment in stock market. The SIP investment schemes help investors to save regularly and get the benefit of both phases of market i.e. Bull & Bear.
How long should one invest in SIP?
Generally, the holding period of SIP investment is 3 years. However, the financial advisers suggest to invest in SIP for a longer duration (minimum 5 years). When invested for long term, SIP can work wonders.
What about returns?
There is nothing known as great returns, as they are relative to each other, depending on the investment made, the time of investment, the risk factor, the associated taxation liability and the final return.
Advantages Of SIP:
One does not have to time the markets Investors need not worry about timing the market as it is taken care of by the assigned mutual funds.
Involves Less Risk Going via SIP route has relatively less risk compared to investing money directly in stocks.
Flexibility In Paying Installments With SIP, one has the freedom to pay a pre-decided amount of money according to his convenience, i.e., even if you miss paying an installment, nobody will come after you with legal notice.
Highly Liquid If invested in open ended mutual funds, an investor can stop or terminate the investment at any point of time in case of a financial emergency. However, investments bear fruits if done for long-term.
In order to set-up the best SIP (Systematic Investment Plan) with great returns for yourself, please follow the steps below:
Figure out your goal/plan What is the purpose of your investment? to grow your wealth or to protect it? or to use it towards a specific expenditure in a few years? whatever we do in our life, the goal/purpose/objective should be well thought of else we are doomed to wander in randomness.
Set a target amount For the goal. For e.g. a goal to buy a car worth Rs. 10 lakhs!
Set the time horizon To achieve the above goal. In how many years do you want to own that car, 5 years? This is the time period for which your investment for this particular goal should be done.
Further, keep one thing in mind that equity investments should be for the long term. Now, to make sense of that long term, look at the past 18 years data, in any 10 years period (rolling) the worst performance of Sensex is 8% which is even higher than the average post tax returns on Fixed Income. Please, note again, this was the worst case. (Refer to source here: How risky is investing in the stock markets after all? )
Assess your risk profile To check your own risk taking capacity, otherwise you will be either taking too much risk (higher exposure to stock market/equity mutual funds) or too less (higher exposure to fixed income like FDs, debt mutual funds, endowment plans etc.). For e.g. a typical moderate risk profile portfolio would have 60% in equity and 40% in debt.
Asset Allocation i.e percentage of money that should be invested in each equity (Asset type - risky but higher returns) and fixed income/debt(Asset type - safe but lesser returns), based on your risk taking capacity and time horizon to achieve the goal. For shorter time horizons, invest more in debt. For longer time horizons invest more in equity. However don’t exceed your risk tolerance while doing so.
Select the best funds For each asset class, run an in-depth analysis to come up with a list for consistent mutual fund out-performers with the best returns. This list should be monitored and should be updated over time. It is advisable to invest in well diversified funds only and leave the allocation in different sectors (like Banking, FMCG, Health etc.) to the professional fund managers.
Start investing In your goal to achieve it! This is a critical step because majority people just daydream about their plans and therefore it is important to overcome your inertia of actually starting/implementing the plan. The investment frequency should match with your cash inflow, e.g. monthly for a salaried person.
Stick to the plan Periodically monitor your goal path to check if you are on track to achieve it. If you are out of track then analyze the problem (e.g. you missed investing in a particular month) and do the course correction (e.g. putting the missed investment amount in the goal) to bring yourself back on track to achieve the goal.
Re-balance To keep yourself on track
1. Review funds periodically and switch if necessary to keep yourself invested in the best performing mutual funds all the times according to your strategy.
2. When the market moves up/down substantially - bring yourself back to your own asset allocation (e.g. back to your 60:40 ratio).
3. As you start approaching closer to the end of your goal then gradually start moving money out of equity to debt mutual funds in order to decrease risk and uncertainty.
The longer the SIP duration, coupled with periodic re-balancing, the lesser the risk (volatility) because of rupee cost averaging and covering more economic cycles. It then tends to match with nominal GDP rate or the growth of the underlying economy/businesses.