Article

7 Quick Tips to Choose the Best SIP Plan

07 Aug 2019

SIPs give you the advantage of matching outflows to inflows and also proffer the benefit of rupee cost averaging. But even in SIPs you need to make a selection. Here is how you should go about investing in a systematic manner.

Step 1: Set out long term goals and tag SIPs to goals

For those who are planning for retirement or for child’s education, the best way is through equity SIPs. SIPs work best when they are designed around equity funds. But for SIPs to be meaningful, they must be tagged to a long term goal. You can have multiple SIPs tied to a single goal or a single SIP tied to multiple goals. This induces discipline in your SIP investment as you know the purpose and hence tend to be glued to it over the long term.

Step 2: SIP on products based on your risk-return trade off

You can do SIPs on equity funds, debt funds or even liquid funds. That entirely depends on your goal, the time horizon and the criticality. If the tenure is shorter then you must rely on a liquid fund or liquid plus funds. SIPs on equity funds work best when the goal is for the long-run like beyond 7 years. Ideally, structure these long term goal SIPs on diversified equity funds or multi cap funds. Sectoral and thematic funds are best avoided.

Step 3: What is better – direct plan or regular plan?

You need to make a conscious choice depending on the extent of advisory support you are looking at. In direct plans you do not pay the distribution and trail fees. Hence the total expense ratio (TER) is 100-125 basis points lower and therefore the returns are higher. You need to evaluate the cost benefit analysis. Another midway is to opt for direct plans and then rely on an independent advisor to partner you through the goals.

Step 4: Equity SIPs are for long term

Equity SIPs are not for instant gratification. In a longer time-frame, SIPs make the power of compounding work in your favour. For example, if you try 3-year equity SIP, you could be disappointed as the cycles may not work in your favour. The longer your SIP sustains the more rupee cost averaging works in your favour. In the event, the cost of acquisition is brought down and the returns are enhanced.

Step 5: Make a conscious choice of funds for SIPs

All equity funds in the market may appear to be equal. Get the right framework to select funds for your SIP. For starters, look at the pedigree and the AUM of the fund. Secondly, avoid buying into funds where the fund management team changes too often. This leads to inconsistent investment philosophy. When you look at returns for comparison, focus less on absolute returns and more on risk-adjusted returns and the consistency of returns.

Step 6: Decide on a fixed SIP amount and stick to it

Investors often debate if they should increase the SIP amount when markets correct and reduce when markets go up. That is a lot like timing the market. It is difficult and also does not add value. In SIP the whole idea is that you allow time to work in favour of your cost and the compounding to work in favour of your returns. Invest in a good SIP and don’t try to time the market.

Step 7: Benchmark SIP performance with index and the peer group

These are two different issues. You invest in a SIP so that you get the benefits of active fund management since index returns can be earned through an index fund. Your equity SIP must outperform the index fund SIP by a reasonable margin on a sustained basis. That is when you know that the fund manager is doing her job. You look at the peer group to assure yourself that your fund manager is not out of sync with reality.

Don’t treat your SIP as an all passive affair. There is a method you can apply for profitability!

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Beginner's Corner

7 Quick Tips to Choose the Best SIP Plan

07 Aug 2019

SIPs give you the advantage of matching outflows to inflows and also proffer the benefit of rupee cost averaging. But even in SIPs you need to make a selection. Here is how you should go about investing in a systematic manner.

Step 1: Set out long term goals and tag SIPs to goals

For those who are planning for retirement or for child’s education, the best way is through equity SIPs. SIPs work best when they are designed around equity funds. But for SIPs to be meaningful, they must be tagged to a long term goal. You can have multiple SIPs tied to a single goal or a single SIP tied to multiple goals. This induces discipline in your SIP investment as you know the purpose and hence tend to be glued to it over the long term.

Step 2: SIP on products based on your risk-return trade off

You can do SIPs on equity funds, debt funds or even liquid funds. That entirely depends on your goal, the time horizon and the criticality. If the tenure is shorter then you must rely on a liquid fund or liquid plus funds. SIPs on equity funds work best when the goal is for the long-run like beyond 7 years. Ideally, structure these long term goal SIPs on diversified equity funds or multi cap funds. Sectoral and thematic funds are best avoided.

Step 3: What is better – direct plan or regular plan?

You need to make a conscious choice depending on the extent of advisory support you are looking at. In direct plans you do not pay the distribution and trail fees. Hence the total expense ratio (TER) is 100-125 basis points lower and therefore the returns are higher. You need to evaluate the cost benefit analysis. Another midway is to opt for direct plans and then rely on an independent advisor to partner you through the goals.

Step 4: Equity SIPs are for long term

Equity SIPs are not for instant gratification. In a longer time-frame, SIPs make the power of compounding work in your favour. For example, if you try 3-year equity SIP, you could be disappointed as the cycles may not work in your favour. The longer your SIP sustains the more rupee cost averaging works in your favour. In the event, the cost of acquisition is brought down and the returns are enhanced.

Step 5: Make a conscious choice of funds for SIPs

All equity funds in the market may appear to be equal. Get the right framework to select funds for your SIP. For starters, look at the pedigree and the AUM of the fund. Secondly, avoid buying into funds where the fund management team changes too often. This leads to inconsistent investment philosophy. When you look at returns for comparison, focus less on absolute returns and more on risk-adjusted returns and the consistency of returns.

Step 6: Decide on a fixed SIP amount and stick to it

Investors often debate if they should increase the SIP amount when markets correct and reduce when markets go up. That is a lot like timing the market. It is difficult and also does not add value. In SIP the whole idea is that you allow time to work in favour of your cost and the compounding to work in favour of your returns. Invest in a good SIP and don’t try to time the market.

Step 7: Benchmark SIP performance with index and the peer group

These are two different issues. You invest in a SIP so that you get the benefits of active fund management since index returns can be earned through an index fund. Your equity SIP must outperform the index fund SIP by a reasonable margin on a sustained basis. That is when you know that the fund manager is doing her job. You look at the peer group to assure yourself that your fund manager is not out of sync with reality.

Don’t treat your SIP as an all passive affair. There is a method you can apply for profitability!