Strategies for SIP investment

Srikala Bhashyam Investing every month into an equity fund lets you walk away with higher returns than any other investment option. But such prospects get brighter over the long term simply because over a longer period of time, investors will be sitting on a larger base of mutual fund units.

For instance, if an investor has accumulated 10,000 units over a period of time, even a rise in NAV by Rs 2 over in a month, helps him earn a profit of Rs 20,000. That is not a bad amount for any class of investor?

While SIP no doubt allows you to enjoy the benefits of compounding, it is also important to be with the right fund with some basic investment strategies. Here are some tips to build your SIP portfolio:

Is equity trading bad for your financial health?

Start with a core diversified fund: While all of us hate the idea of losing money and want to maximise returns, the aggression need not be the driving principle of SIP strategy. As SIP lets you invest on a monthly basis, it does the job of minimising risk over a period of time.

The job of diversification across sectors is best done by diversified funds and hence, it is important to have good allocation towards these funds. Unlike sector funds or thematic funds, diversified funds allow the fund manager to shift from one sector to another depending on their future prospects. For fresher and seasoned investors, a liberal allocation in favour of diversified fund is a must.

Are MIPs of mutual funds a safe bet?

Avoid SIP for short-term needs: While SIPs let you earn good returns over the long term, they can turn risky in the short term when signed up for equity funds. Hence, avoid SIPs if your investment horizon is less than one year.

Besides the risk of capital loss, there are additional costs in the form of exit load if withdrawn in less than one year. This could hamper the overall returns of the investment.

Remember the lessons learnt from the gloom

Volatility is welcome: If you are an investor who has signed up for SIP, the volatility in stock market should be a blessing in disguise as only a volatile equity market allows you to average out your cost.

The returns provided by SIPs in the last two years is a testimony to the concept as most SIPs have generated handsome returns because of the long downtrend and subsequent uptrend in stock prices.

Not too many eggs: There is a misconception among many that they are better off by splitting their SIPs across different funds. I have seen many investors having five SIPs in diversified funds with a monthly contribution of Rs 2,000 as it gives them comfort of risk diversification.

A diversified fund in itself is a cushion against risk and instead, spread your basket across different themes and sectors. Also, remember that no amount is huge or risky for an SIP as the investment is made at regular intervals.

Having said that, monitor the performance of your fund with its peer group and if it continues with its underperformance for a longer period of time, it's time to switch out of the fund.

What is best? SIP or lump sum

Always remember that thematic funds can carry higher risk and take a longer period of time to turn around the corner after deep market corrections. The classic example in recent times has been the performance of sector funds such as media and entertainment or infrastructure oriented funds, which took heavy beating during 2008-09.

Despite the turnaround in market mood in the last couple of quarters, these funds have been laggards with their performance when compared with diversified funds.

The author can be reached at srikala.bhashyam@gmail.com

The views expressed in the article are the author's and not of Sify.com