Investing in Equity via Systematic Investment Plan

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Investing in Equity via Systematic Investment PlanStock market, on the whole, has fared quite well in the past one year. Investors’ reaction, nevertheless, has been mixed. Some continue to invest into equities, while others are still waiting on the sidelines. This trend sums up the investors’ general lack of interest in this asset class (equity), which if invested into carefully, can reap excellent returns over the long term.

People generally don’t trust the sustainability of equity returns. Market volatility and bad experiences also keep them away. Thus, they lose out on the opportunity to enter during early phases of the market rallies. ​

If looked at carefully, equity investments yield best results if they’re indulged into in a systematic manner and with a long-term perspective. While the long-term approach negates the effects of medium and short term market volatility, systematic investment strategy prevents one from committing more than what is advisable at particular market levels.

You must also pay heed to the medium chosen for equity investments, to fetch optimum returns. Hence, a good number of investors choose to invest into equities via mutual funds, taking the SIP(Systematic Investment Plan) route.

​If you’ve avoided equity funds so far for any particular reason, it’s time you take the plunge into equity fund SIPs. However, don’t do it because market is yet to manifest its peak levels. Rather, do it because investing into equity funds using a disciplined and long-term approach, you can accomplish your long-term life stage goals like children’s education/marriage, retirement planning etc. By investing over a time horizon of 10 to 15 years, you won’t have to worry about the fluctuating market levels. ​

On the other hand, you shouldn’t take SIP returns for granted. Following are some important factors you must carefully consider to ensure that you receive healthy and timely returns to meet your different life stage goals.

Work out your weekly/monthly/quarterly SIP investment amount carefully

​People often start SIPs without giving a good thought to the amount they can invest comfortably. Many times, they overcommitment, trying to make up for the lost time, and then find it hard to continue their SIPs after sometime. ​

Resultantly, their investments stop and their long-term life stage goals get compromised. Therefore, with systematic investment plans, you must always start conservatively and increase the investment amounts slowly over a period of time, to ensure continuity.

Have a long-term investment horizon ​

Investors often sign up for SIPs for a year, deciding to renew after assessing their performance after a year. Many a times such investors have to face disappointment when this assessment time comes, especially if the markets are in a volatile phase at that time. ​

Such first-year or one-year assessments are quite illogical and unjustified to gauge the effectiveness of equity funds or a powerful investment tool like SIP. You must clearly define a long-term investment horizon for yourself before starting a SIP. This will prevent you from pulling out during the difficult times. Please always keep in mind that additional units bought during the lower market levels will help you in maximizing your long-term returns. ​

Select the right equity funds

​When investing into equity funds via SIPs, although you’ll reap the rupee cost averaging benefits during the volatile market phases, you must avoid investing majorly into aggressive funds like sector, thematic and mid-cap funds. ​

Excessive aggression doesn’t guarantee better returns. Rather it can make your portfolio overtly risky, possibly even derailing your life stage related investment goals. Have mid-caps as a part of your portfolio, but majority of it should comprise of large cap funds.

Growth option yields great benefits

​You can utilize the compounding power of SIPs to achieve your different life stage goals to the best when you stay invested for the long-term and re-invest your gains as well. Avoid taking out yearly dividend, and opt for the growth option instead.

Link SIPs to goals

As with any investment, you should link the SIP with a specific financial goal. If you don’t keep an eye on your goals, you will invest in a haphazard manner and fall short of your requirements.

List your financial goals in order of priority, fix a time frame for achieving these, and finally, quantify each goal in terms of the corpus required.

Once this is done, you can make SIP investments corresponding to each goal, depending on the time horizon and risk profile. Other non-equity investments can also be supplemented with the SIP to meet the goals.

Fund houses allow SIP investments on specific dates of a month. One can provide ECS mandate or a direct debit instruction to be carried out on, say, the 1st, 5th, 15th, or 20th day of a month.

If you have multiple SIPs across 3-4 mutual funds, it would be better to stagger the payout over the entire month, instead of giving the mandate for all SIPs on a single day.

In this way, you retain liquidity in your savings account as the entire money is not drained out at one go. The bigger advantage is that you reduce the risk of timing the market because the money is invested on different days of the month, negating the impact of adverse market movements.

Step up the yearly commitment

Though SIPs allow you to invest a fixed sum every month, you don’t have to stick to this amount over the entire tenure. As your income rises, your savings will also go up. So, the SIP amount should also increase in the same proportion.

Keep in mind that your requirement of funds will increase over the years due to inflation. Having a step-up SIP approach, where you hike the monthly commitment every year, will ensure that you keep pace with inflation and changes in lifestyle.

The surplus saving need not be directed to an SIP in another scheme, but can be allocated to the existing SIPs.

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