What you should focus on while deciding your SIP allocation

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.