Heres How To Make SIP More Effective

Investing through SIP is a very effective investment strategy as you commit to investing a certain percentage of your “take home salary” and that goes a long way in ensuring that you save as you earn. Moreover, the commitment to invest every month takes away emotions out of your decision-making process. These emotions vary from “greed” to “fear”, depending upon the state of the stock market, which often makes it difficult to make sound investment decisions. By adopting a disciplined investment approach propagated by SIP, you can benefit from the volatility in the market through “averaging”—investing at different levels of the markets—rather than worrying about it. 

Hemant Rustagi 
Chief Executive Officer, Wiseinvest Advisors

Here’s what you need to do to benefit from the true potnetial of this amazing process.
The earlier you start, the better : It is crucial to start investing early through SIP as it allows you to invest for a longer period and benefit from the “power of compounding”. Remember, delaying your investment can prove very costly.

Align your investments to your goals- While SIP is a great tool to build a large corpus through smaller contributions over time, it is important to have a purpose to your investment. All of us have investment goals to be achieved like buying a house, providing for children’s education and marriage, going on a vacation and creating a retirement fund that allows you to retire comfortably.

By defining your goals, assigning a time horizon and target for each one of them, you can work out which asset class to invest in and how much to invest every month to achieve each of the targets. Also, create a separate portfolio for each of your goal, rather than creating a pool. This approach will help you in not only monitoring the progress of the portfolio, but also in ensuring that money is utilized for the goal it was intended to achieve.

Opt for growth option- The power of compounding works out the best when you invest for the long term and allow the gains to remain invested. Taking out money through dividend would defeat the purpose. So, go for the growth option.

Avoid investing randomly- Investing randomly through SIP can prove to be counter-productive. For example, if you decide to invest through SIPs in equity funds only for a year or so and if the market doesnot perform well during this short period, you will be disappointed and could feel compelled to stop investing. Remember, this would be an illogical way of assessing the performance of an asset class like equity and the effectiveness of a powerful mechanism like SIP. So, invest with a clearly defined time horizon and that can be done by aligning your investment to your goals. 

Continue investing through volatile periods- The objective of investing through SIPs is to turn market volatility to your advantage. Therefore, don’t stop investing when the markets fall. Remember, those could be the best times for you to invest in the stock market. Therefore, you must continue your investment process for a committed period of time, irrespective of the market mood.

Be prepared to see losses during the short term–While investing through SIP will help you tackle the risk of volatility and benefit from it in the longer term, there could be periods where you might see poor/negative short term returns. However, you must remember that investment made during these periods will help you improve your returns substantially when the market turns around. Hence, keep your focus on long-term results rather than getting distracted by short-term uncertainties.

Avoid investing in too many funds-Investing in too many funds can prove to be counter-productive. By definition, mutual funds are diversified and hence having too many funds could result in over-diversification. Remember, it is always difficult to monitor a portfolio that has a large number of funds and that often results in some of the underperforming funds pulling down the overall portfolio returns.