Making Disciplined Investing Effective

Hemant Rustagi Chief Executive Officer, Wiseinvest Advisors

Investing through SIP is an ideal strategy to bring discipline into your investment process as you commit to invest a fixed sum, on a fixed date in a pre-decided fund. So, if you are investing in equity funds through SIP, you save a part of your income every month, avoid timing the market, benefit from averaging and if you stay committed to your time horizon, you also benefit from the true potential of equity as an asset class and the power of compounding. However, to benefit from this disciplined and potentially rewarding approach, you must follow the right investment process. A random approach can either expose you to unwarranted risks or disappoint you in terms of returns.

Remember, you won’t achieve your investment goals by following a haphazard approach of investing a random amount that is either not enough to achieve your goals or exceeds your capacity to invest, thereby compelling you to interrupt your investment process. Ignoring your asset allocation while selecting funds will make your portfolio either very aggressive or very conservative. Investing in too many funds, continuing with the same amount of investment despite rise in your income over the years and not tracking the performance of funds thinking that over time all funds do very well are some of the other pitfalls that can impact the final result.

Here’s how you can figure out whether you are on the right track or not:

Are you investing an adequate amount and in the right funds?    

Both these are important aspects while investing, especially through SIP, to avoid any  disappointment in the future. The right way to begin is to establish goals to be achieved  over short, medium and long-term horizon, set a target and then work out investment amount for each of the goals based on a realistic assumed rate of return. Let us  understand    this from an example. If your goal is to create a corpus of Rs 75 lakhs over the next 16 years, you should be investing Rs 13,000 – based on an assumed annualised return of 12% - in equity funds.

Similarly, if you require Rs 2.50 crore after 30 years as a retirement fund, you need to invest Rs 7,000 per month through SIP in equity funds. When you follow a similar approach for all your goals, it helps you ascertain your asset allocation and how much money has to be invested per month to achieve each one of them. It is possible that you may not have the required surplus to begin investing for all your goals. In that case, budgeting can help you identify areas where you are spending more than you realise as well as prioritize your goals. The key, however, is to begin investing and increase the investment amount later rather than delaying the investment process itself.

Fund selection has to be the second stage after deciding asset allocation. Once the asset allocation is ascertained based on a time horizon, the next step should be fund selection. For equity funds, you must begin with large-cap oriented multi-cap funds. For hybrid funds, depending upon your time horizon, you can choose a mix of equity savings, balanced advantage and aggressive hybrid funds. For short-term goals, debt funds should be chosen by matching your time horizon with maturity duration of fund holdings.

Are there too many funds in your portfolio? It is a common mistake made by investors. As a result, they not only find it difficult to track their performance but also nonperforming funds pull down the overall portfolio return. If you have too many funds in your portfolio, you must realise that mutual funds themselves are a diversified investment vehicle and hence having too many similar funds doesn’t help in any which way. You must weed out non-performing funds by measuring their performances as against the benchmark and average return of the peer group.

Have you been increasing SIP amount over time? It is important to ensure that you keep increasing the investment amount as your income rises. Even if you have been investing adequate amount to achieve your goals, increasing the investment amount creates a cushion for the future. Mutual funds have made it quite easy to increase investment amount through SIP top-up facility wherein you can opt for an upper limit and increase the amount of the SIP periodically.