Article

Five reasons to increase your SIPs in 2018

07 Aug 2019

As we have seen in the past, mutual funds work best in the long-term. This is even true in the case of equity funds, where you must invest with a perspective of at least 8-10 years to really benefit from the investment. Within the gamut of equity funds, a systematic investment plan (SIP) is a very unique and resourceful method of investing.

Through SIPs, you invest a small sum in a fund on a regular basis; this reduces the pressure on your cash flows and also gives you the benefit of rupee cost averaging. Hence, when you invest in mutual funds, always make it a point to adopt the SIP route.

Should the approach to SIPs be active or passive?

What we are essentially asking here is should you increase your SIP contribution when the markets correct or should you reduce it when the markets appear to be expensive? The only problem with this approach is that it becomes just too active. The investor is required to judge whether the stock market is underpriced or overpriced and time their entry and exit accordingly. This becomes too demanding and past empirical data is testimony to the fact that the incremental benefits of such active approach is nothing to really write home about.

So, with the Nifty and Sensex correcting close to 10% and still looking vulnerable, what should you do in October 2018? What’s more is that even mid-caps and small-caps have been battered by the markets in the past eight months. Considering all this factors, a case-by-case approach would work better in this case.

A selective approach: 5 reasons to hike your SIP in 2018

One of the basic rules of the SIP approach to investing is that you keep investing a constant amount periodically so that you can make the best of the time that is working in your favour.

Here are 5 approaches to increasing your SIP.

  1. Year 2018 has seen a frenetic rally but it has also been volatile and looked vulnerable. However, for an economy that is still promising to grow at 7.5% annually, this volatility should be at par for the course. Also, in the last 2 years, you probably never increased your monthly SIP contribution as you were worried about valuations dropping. Now, the index P/E is down at least 3x and this is the best time for you to increase your SIPs. You don’t need to time the bottom of the rally but you can use this opportunity to enhance your SIPs in sync with your rising income levels.

  2. It is not just about the quantum of increase in your SIP amount; it also matters where you allocate the investments. For example, if all your SIPs are in large-caps, then it is time to shift to multi-caps, which give you the best mix of growth and value. If you are exposed to mid-cap SIPs, this is again a good opportunity to pare down your mid-cap SIPs and focus more on multi-cap SIPs, which can be the best bet in these markets.

  3. If you are into sectoral or thematic SIPs, then it is time to exit these specific themes and prefer a more nuanced mix of multi-cap funds. They combine the solidity of large-caps with the fleet-footedness of mid-caps and give you a better risk-reward trade-off. Your process flow should be as under. First, look to reallocate your sectoral and thematic SIPs substantially into multi-cap SIPs. Once that is done, then you can look to increase the quantum of your SIPs.

  4. The fourth reason to add to your SIPs in this market is that India’s growth story has some unique advantages. For starters, you have an economy that is still growing at the fastest pace among the largest economies with a GDP of more than $2.50tn. The government has just managed to keep fiscal deficit under control. The rupee at 73/$ gives a better entry point because your SIP could now benefit from the strengthening of the rupee plus the GDP growth plus the market re-rating. That is why adding to your SIPs at this juncture makes a lot of business sense.

  5. Last, but not the least, your SIPs are typically tied to goals. For example, equity funds are tied to long-term goals like retirement, child’s education, etc. These requirements are made at a point of time based on certain assumptions. However, these assumptions may not hold true for various reasons. For example, inflation may accelerate faster than you had assumed it would; asset returns may turn out to be lower; you may acquire additional liabilities along the way. In all these cases, a higher SIP comes in handy.

With the markets down and the rupee weaker, this is perhaps the ideal time to execute the SIP accretion.

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Five reasons to increase your SIPs in 2018

07 Aug 2019

As we have seen in the past, mutual funds work best in the long-term. This is even true in the case of equity funds, where you must invest with a perspective of at least 8-10 years to really benefit from the investment. Within the gamut of equity funds, a systematic investment plan (SIP) is a very unique and resourceful method of investing.

Through SIPs, you invest a small sum in a fund on a regular basis; this reduces the pressure on your cash flows and also gives you the benefit of rupee cost averaging. Hence, when you invest in mutual funds, always make it a point to adopt the SIP route.

Should the approach to SIPs be active or passive?

What we are essentially asking here is should you increase your SIP contribution when the markets correct or should you reduce it when the markets appear to be expensive? The only problem with this approach is that it becomes just too active. The investor is required to judge whether the stock market is underpriced or overpriced and time their entry and exit accordingly. This becomes too demanding and past empirical data is testimony to the fact that the incremental benefits of such active approach is nothing to really write home about.

So, with the Nifty and Sensex correcting close to 10% and still looking vulnerable, what should you do in October 2018? What’s more is that even mid-caps and small-caps have been battered by the markets in the past eight months. Considering all this factors, a case-by-case approach would work better in this case.

A selective approach: 5 reasons to hike your SIP in 2018

One of the basic rules of the SIP approach to investing is that you keep investing a constant amount periodically so that you can make the best of the time that is working in your favour.

Here are 5 approaches to increasing your SIP.

  1. Year 2018 has seen a frenetic rally but it has also been volatile and looked vulnerable. However, for an economy that is still promising to grow at 7.5% annually, this volatility should be at par for the course. Also, in the last 2 years, you probably never increased your monthly SIP contribution as you were worried about valuations dropping. Now, the index P/E is down at least 3x and this is the best time for you to increase your SIPs. You don’t need to time the bottom of the rally but you can use this opportunity to enhance your SIPs in sync with your rising income levels.

  2. It is not just about the quantum of increase in your SIP amount; it also matters where you allocate the investments. For example, if all your SIPs are in large-caps, then it is time to shift to multi-caps, which give you the best mix of growth and value. If you are exposed to mid-cap SIPs, this is again a good opportunity to pare down your mid-cap SIPs and focus more on multi-cap SIPs, which can be the best bet in these markets.

  3. If you are into sectoral or thematic SIPs, then it is time to exit these specific themes and prefer a more nuanced mix of multi-cap funds. They combine the solidity of large-caps with the fleet-footedness of mid-caps and give you a better risk-reward trade-off. Your process flow should be as under. First, look to reallocate your sectoral and thematic SIPs substantially into multi-cap SIPs. Once that is done, then you can look to increase the quantum of your SIPs.

  4. The fourth reason to add to your SIPs in this market is that India’s growth story has some unique advantages. For starters, you have an economy that is still growing at the fastest pace among the largest economies with a GDP of more than $2.50tn. The government has just managed to keep fiscal deficit under control. The rupee at 73/$ gives a better entry point because your SIP could now benefit from the strengthening of the rupee plus the GDP growth plus the market re-rating. That is why adding to your SIPs at this juncture makes a lot of business sense.

  5. Last, but not the least, your SIPs are typically tied to goals. For example, equity funds are tied to long-term goals like retirement, child’s education, etc. These requirements are made at a point of time based on certain assumptions. However, these assumptions may not hold true for various reasons. For example, inflation may accelerate faster than you had assumed it would; asset returns may turn out to be lower; you may acquire additional liabilities along the way. In all these cases, a higher SIP comes in handy.

With the markets down and the rupee weaker, this is perhaps the ideal time to execute the SIP accretion.