Which is the best SIP of them all? The logic decoded

The key ingredients for investors to do well on a consistent basis are systematic investing process and a clearly defined time horizon. It is heartening to see an increasing number of investors opting for Systematic Investment Plan (SIP) to invest in mutual funds. However, despite SIP gaining popularity over the last few years, there is still an ambiguity in the minds of many investors about this concept.

The most commonly asked question is "Konsa SIP acchha hai?" Investors must know that SIP is a mechanism and not a product, as is often perceived. SIP allows you to invest in a discipline manner as you commit to invest a fixed sum. However, you must follow certain basic principles to make systematic investing more effective over the longer term. Here are some of these and how they can benefit you.

Start investing early
Investing early is a great strategy as it not only allows you to benefit from the power of compounding, but also makes you comfortable with vagaries of the markets. Delaying investment can prove to be costly. For example, if one starts investing Rs 5,000 per month in equity funds at the age of 25 and continues investing till the age of 55, the expected corpus would be around Rs 1.76 crore (assumed annualised return of 12 %). However, if you start 10 years later, the expected corpus would be Rs 50 lakh.

Be disciplined
Don't make the mistake of investing randomly in a few schemes that are in the limelight due to eye-popping returns generated over short-term. While these schemes may do well for some time, the level of investment success you achieve will largely depend upon how these investments contribute towards your investment goals. Not establishing your goals upfront makes it extremely difficult, if not impossible, to decide the right asset allocation as well as track the progress of your portfolio.

Choose funds carefully
Once your asset allocation is in place, that is, which goals require investment in equity funds, hybrid funds or debt funds, the next step should be to choose funds that can get you the best from the chosen asset mix. Opt for funds that have a consistent performance track record vis-à-vis their peer groups over longer periods.

Don't invest in too many funds
Investing in too many funds can be counter-productive, as MFs themselves are diversified. Over-diversification doesn't benefit you in any way. In fact, it might make it difficult for you to monitor your portfolio and that can result in some non-performing funds pulling your overall portfolio returns down.

Invest more as income grows
Keep increasing your investment amount as your income grows. This will not only take you closer to your goals, but also ensure that you have sufficient money at different stages of your life.

Be prepared for negative returns
Don't panic when some funds produce negative returns for certain periods. In fact, investments made at lower levels improve your returns over the longer term. Therefore, never make the mistake of discontinuing your investments because of short-term negative returns.

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Direct v/s regular
The advent of a number of digital platforms offering direct plans has made it easier to invest directly and reduce cost of investing. While costs are important and do make a difference to your returns over the longer term, it is important to remember that investing is just the start of your investment process. During the period you remain invested, there will be many challenges that may require you to make some crucial decisions. Therefore, your decision whether to go direct to reduce cost or through an advisor and bear some additional cost should depend upon how confident you are about meeting these challenges and monitoring your portfolio through your defined time horizon.

By: Hemant Rustagi
(The writer is CEO, Wiseinvest Advisors)

Source: DNA Money