Sep 27, 2017 05:15 PM IST | Source:

What you should focus on while deciding your SIP allocation

The average SIP size is Rs 3,250 and the month-wise collection through SIPs is just under Rs 5,000 crore per month now. It shows investors are walking in the right direction.

Joydeep Sen

You couldn’t have missed the ‘Mutual Funds Sahi Hai’ campaign. While the message in the campaign is true, we will discuss the reasons why, to give you a better perspective. Just to give a data point to start with, the number of systematic investment plan (SIP) accounts are now as high as 1.52 crore and the Mutual Fund industry added more than 8 lakh SIP accounts per month on an average in FY 2017-18. The average SIP size is Rs 3,250 and the month-wise collection through SIPs is just under Rs 5,000 crore per month now. It shows investors are walking in the right direction.

There are multiple reasons why SIP is the right choice, particularly for small to medium investors (SMIs). The foremost reason, though you would have heard it earlier but just to refresh it, is the power of compounding over a long horizon. Let’s say your age is 25, your expected retirement age is 60 (i.e. 35 years of SIP) and the amount of SIP is Rs 3,250 per month. Assuming a rate of return of 10 percent per year in your SIP, after 35 years, your contribution of Rs 3,250 per month would grow to as much as Rs 1.24 crore. Sounds impressive? But if you are late by even five years, the corpus after 30 years (instead of 35 years) would be Rs 74 lakh. And if you are late by five more years i.e. start at age 35, the corpus would be Rs 43 lakh. The advantage of SIP is not only that you are not trying to time the market, it is also about availability of the money to invest. It is conceptually like a recurring deposit; instead of deposits, the money is going into an equity fund.

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The queries that crop up most frequently in Moneycontrol Master Your Money (MYM) sessions are about the choice of funds for SIP. It is but natural for investors to be worried about their choice of funds. What needs to be appreciated is that as long as you are walking, you are making progress. Choice of funds is relevant, but all mutual funds are SEBI regulated entities and all are managed by professional fund managers. Nobody knows for sure, not even any expert, that if you are putting your money in five funds, which of these will give how much or which will be the best performer after say 5 years or 10 years. In case somebody could tell that after 10 years fund A will give a return of 14.67% CAGR and fund B will give 13.92% CAGR, he would be God.

The point I am making is, the frequently asked question (FAQ) ‘which is the best fund’ has no clear answer. If we are trying to extrapolate the performance of last 1 year or 5 years for the next 1 or 5 years, it is anybody’s call. Net-net, select fund from AMCs that have a proven track record in managing that kind of fund i.e. large cap / diversified / thematic / small or medium cap as well as the CIO / fund manager having a proven track record. You may spread your money over say 4 or 5 funds, need not diversify too much, as the underlying portfolio of the funds are diversified. You may bet your money with say 5 fund managers, but need not spread it over 10 fund managers.

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Rather than ‘which fund is the best’, you need to focus on the following for deciding your SIP allocation:

• If you are putting all your money in equities, you have to have a long horizon. If you are young, say 30 year old, and do not require the money in a hurry, feel free to go ahead.

• If you are not-so-young, say nearing retirement, do not put 100% of your money in equities as it can be volatile, particularly now as the valuations are not very attractive. You should park a part of your money in debt funds. To give you a perspective on volatility with historic data, over the last 38 years, on a 1-year holding period, equity (represented by Sensex) has given positive returns 25 times i.e. the success ratio is 66%. On a 5-year holding period, positive returns have been obtained 31 of 34 times i.e. success ratio improves to 91%. On a 10-year holding period it is 97% and beyond that, over 15 and 20 years, it is 100%.

• You may go direct to mutual funds after doing some basic due diligence. If you are short of time or not sure of how to go about it, you may take advice from an advisor or go through a distributor.

The writer is an independent financial advisor.
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