SIP is more popular as an investment option in wealth management in the recent times. However, it needs careful evaluation too
Over the last couple of years, the support for systematic investment planning (SIP) has become louder with even mutual funds going all out to increase the investor base under this concept. In fact, figures of 50 lakh accounts within the next couple of years are being talked about in the mutual fund industry circles. With the average SIP value in India pegged at Rs 2,500, the corpus at stake is mind boggling.
Interestingly, the stock market is the perfect place for the success of SIP as the volatility is an integral part of the domestic markets. In the last few trading sessions, a day's trading has been through a wild range of 100-200 points and has been a trader's paradise. Even though the indices on the whole are moving in narrow range, the volatility on an hourly basis has been very sharp. That makes the task more challenging for an individual investor who can find it difficult to time the markets. Hence, individual investors are being increasingly pushed towards SIPs in recent times.
When the broader markets in general deliver returns, the choice of a fund for SIP is less significant. With the concept of SIP getting older and choice of funds for SIPs getting wider, the time has come to choose funds for a SIP a little carefully. Since SIP performance is all about the power of compounding over a long term, a difference of few percentage points in annual returns can make a big difference over a long term.
Here are some tips to choose funds for a SIP portfolio:
More volatility good
Normally, investors would hate to pick funds which are volatile. But for a SIP portfolio, this need not be a concern. On the contrary, it can be a blessing in disguise. Though one will have to be cautious with exits and book profits on a more frequent basis, funds which have high volatility can be good for SIPs.
So, a portion of the monthly savings can be in such funds to boost overall returns.
Vanilla funds are for all seasons
Analysts will always advise that every investor should commence his SIP journey with a diversified fund as they are for all seasons. While diversified funds invest across sectors and scale of companies, funds with a large-cap focus will require least monitoring and hence they should be the first choice and should also account for a minimum of 50 percent of you savings.
Keep it simple
When an investor signs up for a SIP, he is automatically lowering risk in his investment strategy. First, by taking the mutual fund route, which invests across a basket of stocks, and the SIP with its systematic nature ensures less risk.
Hence, there is no need for further simplification of strategy with a wide range of options. A small bouquet of schemes should do the job for a SIP portfolio.
Past performance holds key
Investors often tend to get swayed by the performance of funds on the day of investing but the strategy may backfire in the case of SIPs. Systematic investing is all about sustaining performance over a longer period of time, and hence, past performance holds the key in the choice of portfolio. Even if past performance may not be sustained, they surely provide comfort for a long-term portfolio.
