When retail investors are set to invest in mutual funds, financial advisors — more often than not — tell them to invest via systematic investment plans (SIPs). But not many apprise them of the key factors that could drive their investment plan in a mutual fund. Some of the factors include time horizon, investment goal and mutual fund category, among others.
Let us understand them in detail here:
Investors must note that the strategy for setting up an SIP can vary based on the category the fund belongs to. This means it could be different for an active fund as compared to a passive fund such as a debt or an index fund.
In case of passive funds, investors can set up a systematic investment plan that aligns with the time horizon for a life goal. So, if the time horizon for a life goal is five years — then the SIP must be set up for five years.
“SIP investing works well in every market condition and this discipline should be continued even in the correcting market,” says Harshad Chetanwala, Co-Founder of MyWealthGrowth.com.
Types of funds
In an index fund, the constituent stocks are linked to an index such as Nifty 50 or Sensex 30. In a debt fund, on the other hand, the scheme tends to invest in debt instruments such as bonds and government securities.
In case of active funds, the risk element increases drastically since where constituent stocks are chosen in a bid to outperform the index.
So, there are no prizes for guessing that the rules of the game tend to change for active funds. In case of active funds, the SIP must be set for one year at a time. The regularity with which an active fund is in generating alpha, the lower is the active risk.
It is possible that a fund can post poor returns soon after you invest into a fund even if it outperformed the index in the previous year.
How to choose SIP
Some experts argue that investment should ideally be made in a systematic way — be it SIP or lumpsum. “These days investors can invest in SIPs across PMS, advisory, and Mutual Funds. After the asset allocation and product selection, SIPs should be preferred. Even the lumpsum investments should be made in a systematic way to average out the buying price,” says Ankur Kapur, Managing Director of Plutus Capital.
At the same time, some investors who wait for the market correction to invest in the market in lumpsum are advised to contemplate SIPs.
“There is always an opportunity to invest in equity mutual funds when the stock market consolidates or corrects. During such volatile times, you need not invest all the money in one go. Investing gradually on days when the market consolidates reasonably is a good approach. This will help you invest at a lower NAV as the portfolio value of the fund would have got impacted. At the same time, it helps you average out your investment cost and reduce the risk as well,” says Chetanwala.
Does the date matter?
Some investors believe that choosing a particular date for setting an SIP can offer better returns than the returns on other dates. In others words, SIP on one day (say 5th of each month) will likely report better returns than SIP on say (8th of each month).
But financial advisors refute this. “There can be no significant difference in your investment return if you choose one day say early of the month over other days. And even if there is, it is merely a stroke of luck which can’t be predicted in advance,” says Deepak Aggarwal, chartered account and financial advisor.
It is vital to note that SIPs are a mere a mode of investment and not an investment per se. So, investors must follow the principle of diversification while investing in mutual funds.
“The key is to invest in the funds that are working well and do not over invest in any particular fund or funds. Many investors stop their SIPs during volatile market conditions which is wrong as you should be investing during such times to take advantage of low NAV and you get more units for the same amount of investment,” add Mr Chetanwala.