How to get 100% value out of your systematic investment plan (SIP)?

The systematic investment plan (SIP) has been a great mutual fund tool to create wealth over the long term. This has been consistently proved; both intuitively as well as statistically. However, one needs to keep in mind certain basic issues while designing the SIP. Some basic points will go a long way in ensuring that you get 100% value for your SIP.

Take at least a 5 years perspective…

An SIP is all about rupee cost averaging. Therefore to get the benefit of returns, you need to get the average cost in your favour. When markets are volatile, it often happens that in the short term your SIP may underperform the index. Remember, an SIP is not designed to give you bumper returns over the very short term. Ideally, the time frame for a SIP should be a minimum of 5 years. If you keep a 5 years perspective and stick to quality funds you will easily outperform the index over a period of 5 years. If you take a short term view and keep switching your SIP from one scheme to another, you will end up getting the worst average price in your funds.

Pigeonhole your SIP to specific goals…

The whole idea of an SIP is to help you meet your long term goals. The only difference is that in an SIP the market also plays along on your side so your contribution will be much lesser over a period of time. But there is still a risk that your SIP may be at cross purposes to your goals. How do you resolve that? The answer lies in pigeonholing your SIP to specific goals. Let us say that you require 3 lakhs after 3 years for a Swiss Holiday; Rs.4 lakhs after 4 years for your car’s margin money and Rs.10 lakh after 7 years to pay margin money on your apartment. You can dedicate specific SIPs for each of these needs. They may either be the same fund or different funds; that is entirely a decision you can take along with your financial advisor. The fact of the matter is that the more well defined your goals are, the easier it is to design an SIP to achieve these monetary targets.

Don’t get stuck to a standard SIP for a long time…

This is a mistake that most investors in an MF SIP commit. They assume an Rs.10,000 investment per month and never bother to increase their SIP amount even when their incomes increase. This defeats the basic purpose of an SIP. The idea of an SIP is that you try to keep your savings ratio constant and in fact also increase it over a period of time. When you keep your SIP amount constant, then your savings ratio actually goes down when your income grows. Ensure that your SIP savings grow in tandem with your income. That will mean that some of your goals get front-ended and you will be able to accommodate more goals within your investment. This is a very important step as it makes the best contribution of your income towards your savings when your income level is growing. Ensure that your savings also grow proportionately with your income level.

There should be a fit between your cash flows and your SIP…

You must ensure that your SIP does not get you into a liquidity crunch. If you are working and get your salary on the 1st of each month, then ensure that your SIP data is set at around the 5th. If you are in business and you have cash flows coming in spasmodically, then try to be conservative and design a weekly SIP. Also keep the SIP amount to match your assured income and not your variable income.

When in emergency, SIP should be your last fallback…

We have already discussed this point briefly when we spoke about long term investments. This point is a lot more specific. Many of us have the tendency to dip into our SIP savings as they are liquid and can be easily liquidated. However, this defeats the basic purpose of the SIP as wealth creation gets negatively impacted. Is there a way out? One way is to allocate 70% of your SIP to an ELSS. This will ensure that at least for 3 years this amount will be under lock-in and therefore you will be forced to resist the temptation of relying on the SIP for liquidity purposes. Whatever the emergency, always make it a point that your SIP is your last resort for financing the need.

A SIP is not just about rupee cost averaging. There are some basic pre-requisites that you need to understand to make a success of your SIP. Taking care of these basic points will go a long way in helping you genuinely create wealth through SIPs in the long run.

For all your mutual fund queries SMS ‘ASKMF‘ to 575758 and we will get back to you

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: