Checklist for Systematic Investment Plan

Systematic Investment Plan (SIP) is often suggested as the best investment option for sustainable wealth creation for retail investors. The arguments for investments into mutual fund using SIP is often based on the fact that investors will be able to overcome vagaries of stock market behavior using SIP. However, in reality not all SIPs work for investors. Many investors complain that SIP started them some years back has failed to generate the kind of return that  investments in stock market has either generated directly or schemes of other mutual funds have given where SIP was used by other investors.

So, what is the lesson learnt. There are many a slip between returns and the SIP. As an investor, you need to circumspect while investing through SIP. Take following steps to ensure that investment made by you through SIP does not become a failure:

Watch the performance of SIP periodically:  Though you can trust mutual fund managers, you need to be circumspect about the investments made by you. Watch your investments in SIP atleast once in six months. This does not mean that you withdraw your investment from SIP if the fund is not performing. This process will help you track something going substantially wrong with your fund. Suppose the benchmark against which your fund operates has given 10% return, while your SIP return is abysmally less, then it may be time to change your fund. A recent study by S & P CRISIL (SPIVA ) shows that more than 50% of large cap funds have failed to beat the benchmark index against which they operate.

Do not start SIP in two similar types of schemes:  Investors put their money in different schemes of one mutual fund or separate mutual funds. However, they end up selecting almost same type of fund. This means that the exposure of the funds is similar type of stocks. It is very common to find stocks like ITC, HDFC Bank etc. in various schemes of mutual funds. The reasons are obvious. These stocks have been star performer for long time. As an investor, you need to check if your fund has significant exposure in similar stocks. This increases risk for you especially when the stocks are not stable performers.

Star funds may not be the star performers always: It is very common for the mutual fund investors to look at star rating of the scheme of mutual funds. The star rating generally comes from past performance and may not always return in good future returns. Do not get swayed away by star rating. Even star rated schemes need to be watched.

All my funds must have SIP: After an investor enters into the world of mutual fund, SIP is recommended to him like Crocin is recommended for headache. It is important to note that all your funds should not have SIP. Let some of your fund perform even for the lump sum investment made by once. This means that for some of your funds you can allow the investment to grow for one time investment made by you while for others you can continue with SIP. Riskier schemes should you SIP route while stable schemes can follow lump sum investment process.  Look at the Sharpe ratio of the funds to identify the riskiness of mutual funds. Sharpe Ratio indicates the risk adjusted return of schemes of mutual funds.

In brief as an investor, you need to watchful about your money when you have given the responsibility of handling it to others.