Why Invest in Multiple SIPs

Mutual funds have gained prominence over the last couple of years as a good option for investors aiming to beat inflation and seeking to build wealth over time. Systematic Investment Plans (SIP) in particular, are popular among people as it allows them to invest a fixed amount at fixed intervals (usually a month) into a mutual fund scheme. This induces fiscal discipline and the investor may possibly not worry about market volatility and trying to time the market. As per AMFI data, the AUM (Assets Under Management) of the mutual fund industry stood at Rs. 17, 54,619 crores. Indian Mutual Funds have currently about 1.35 crore (13.5 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes as of March 2017 with 6.26 lakh SIP accounts added each month on an average.

One of the features of mutual funds is the diversification of the portfolio. A portfolio is the investment made by the fund manager on behalf of the investor into various other financial securities. Instead of buying stocks in one company, the fund managers spread their investments across companies or even sectors based on the investment objective of the scheme. The idea is pretty straightforward. The share prices of companies vary over time and for multiple reasons. If the price of stocks of one particular company is doing badly, another might be doing well. The fund manager tries to spread the loss since the fund manager invests in a diversified security.  This diversification often helps in minimizing the risk for the investor.

However, just as diversification is important for the portfolio of a fund, it is important for SIP investors to have diversification among mutual funds as well. Every investor will have a particular financial goal that they want to achieve. Maybe they need to buy a house a couple years before retirement, a vehicle in the next one year, or a child’s higher education in the next four years. Each has a different time frame and can be classified into long, medium or short term. Hence, each goal will have a different risk and potential return level.

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Such precise goals will require the investor to channel his/her investment into the right fund. For example buying a motorbike in a year or two will be a short term goal. The amount of money and risk required to make that money can be quantified easily. On the other hand, buying a house will be a long term goal and the amount required would be much higher. Also, the investor’s age plays a crucial role in the equity/debt allocation. A young investor can afford to take higher risks and can allocate money in equity-oriented funds, while a middle aged investor or older will have to reduce their equity allocation and divert it into debt funds, which are generally much more liquid when compared to others.