Not only you have to pick the right scheme but also keep reviewing its performance. Also keep adding to your SIP amount.
At a recent social event, I was happy to learn from a few investors that they have SIP investments. Ironically, they thought that SIP in itself is a scheme, not knowing that it is merely an option that one can choose to invest in any mutual fund scheme. Naturally, I figured later that they didn’t even know which schemes they were invested in. Probably, their advisor has not spent enough time to educate the investor about the investment and where the hard earned money is being invested.
How often have you heard, “Enroll into an SIP plan and forget about it for 7-10 years”. Though, the strategy to keep investing regularly is the right way to go, that does not mean that all schemes perform the same. It is prudent to review the schemes chosen for SIP investment. To simply explain this, in the large cap category, over the last 10 years, the best performing fund has delivered 15% CAGR whereas the worst has delivered 8% CAGR. In value terms, this means that if one is investing Rs. 5000 per month, his value after 10 years is about Rs 14 Lakh in one and about Rs 9 Lakh in the other. Hence, periodic review of the scheme’s performance is extremely essential. Ideally, one needs to know how the scheme has delivered in various market cycles and not simply going back few years from the selected date of valuation. One should check the scheme as compared to its benchmark and its peers in times when the overall market underperformed OR when the market moved up. It is practically impossible for any fund manager/scheme to be number one across all tenures. Hence, I prefer schemes that perform consistently rather than being volatile in performance. I am happy if my scheme ranks between 4-8 consistently than being 1 in one tenure and 30 in another.
Besides, what is more important is that an investor plans his SIPs well. I come across many investors who tell me that I want ‘x’ crores in ‘y’ years and so on. When the plan is provided which shows a monthly amount to be invested to achieve the goal, in most cases it is unaffordable at that stage. However, if one is provided an option to periodically keep increasing the monthly investment, it becomes easier to reach the goal without hurting the wallet! On an average, a salaried individual gets about 10% raise each year. Why not increase the investment also by 10% each year or 5% every 6 months? Let’s look at this illustration:
*Assumed Returns @ 12% p.a.
With an additional investment of 111% from traditional SIP, the difference in returns (value-wise) over 15 years is a whopping 306%. With advanced technology solutions, many AMCs and platforms offer the option to increase the SIP, better known as ‘Top-up SIP’. It is a simple process to add the amount by filling another SIP form.
Importantly, it is not required to keep adding the amount in different schemes. At most, four schemes are more than sufficient as long as your chosen schemes are not underperforming. At times, it may get difficult to add the entire SIP amount in one go. In such situations, you can choose either weekly or bi-monthly option to ease the strain on the wallet. Most AMCs provide this solution.
Don’t let your wallet decide your investment value, let the returns on your investments, decide the value in your wallet!
The writer is founder of www.InvestOnline.in, a mutual fund distributor.