Do It The Proper Way

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

Investing through a systematic investment plan (SIP) has proved to be an ideal investment strategy as it brings discipline in one’s investment process. No wonder, over the last few years, systematic investing has gained momentum and an ever-increasing number of investors are adopting this approach. For those investors who may not have yet begun investing through SIP or require more clarity to adopt it, it is important to understand the concept of SIP and why it is important to have a strategy in place even for a disciplined approach.

SIP is an effective investment strategy 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. Remember, ignoring your asset allocation while selecting funds can either make your portfolio 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.

Fund selection has to be the second stage after deciding asset allocation. Once the asset allocation is ascertained based on time horizon, the next step should be fund selection. For equity funds, you must begin with either with flexi-cap funds or large-cap and mid-cap funds or a combination of both. 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. Besides, investing adequate amount is one of the most important aspects to avoid any disappointment in future.

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.

Therefore, the right way to begin would be 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 for your child’s higher education, you must consider inflation while setting a target. Assuming the current cost is Rs 25 lakhs and inflation of 10 per cent, the actual cost after 15 years will be Rs 1 crore. If your portfolio earns say 12 per cent annualised return, you need to invest Rs 21,000 per month to get there.

Similarly, if the time horizon is 20 years, the cost would be Rs 1.68 crore and you need to invest Rs 17,000 per month. As is evident, starting your investment process early for long-term goals can make a big difference to how much you need to invest thanks to the power of compounding. 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 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.