Investing via SIPs? Choose the right amount to reach your goal

Long Term SIP works for your financial goals only if you invest the right SIP amount for the goal.
You would have heard this countless times and from several people: SIP (systematic investment plan) investing works in the long term.
But even though it is a well-established fact (and the best option), there is something else that needs to be given a little more importance than it gets now.
Just because a long-term SIP in equity fund works, it does not mean that you will achieve your long-term financial goals.
Sounds surprising? But hear this out.
Long Term SIP works for your financial goals only if you invest the right SIP amount for the goal.
Random amounts won’t suffice
Let’s take a small example to understand this. Suppose you wish to save up Rs 1 crore in 15 years.
Now many would think that just by investing ‘some’ amount in a mutual fund SIP for 15 years and with hopes of earnings very high returns, you would be able to achieve your goal of Rs 1 crore in 15 years.
Unfortunately, it doesn’t happen that way. As they say, hope is not a great strategy to have in personal finance.
Let’s say that you begin investing a nice round figure of Rs 10,000 SIP per month and keep doing it for the next 15 years.
What would be the final amount after those 15 years?
Assuming 10-12 per cent annual average returns, the investor would accumulate Rs 41-50 lakh.
So, no doubt the SIP worked in the long term and you accumulated close to Rs 50 lakh by just investing Rs 10,000 per month for 15 years. But the point is did you achieve your actual goal of Rs 1 crore in 15 years? No.
And that’s because you did not invest the right SIP amount over these years.
Investing the right sum
A little bit of math will show that to accumulate Rs 1 crore in 15 years at 10-12 per cent returns, you need to do invest Rs 20,000-24,000 per month and not Rs 10,000.
Thus, long-term SIP will work (and it is small investors’ best bet); but whether it helps you reach your financial goals or not depends on not just the returns generated but also on the SIP amount you choose to invest.
You have to choose the right SIP amount to actually benefit from the long-term SIPs when it comes to achieving your financial goals.
In fact, it is so common to see people starting Rs 2000 SIP when they begin earning (like Rs 30,000 per month) and still continuing the same SIP amount of Rs 2000 when their income has increased to Rs 1 lakh a month! They do not increase their monthly investment. However, just a small increase of 5-10 per cent every year can result in the accumulation of a much larger final corpus.
Let’s take the above example of starting with Rs 10,000 SIP per month and see how the final amount changes if the investor increases the amount by just 10 per cent every year.
And the answer is Rs 74-87 lakh.
It is good that you understand that SIP works beautifully in the long term. But for your SIP investments to actually help you achieve your financial goals, you need to invest the right SIP amount and not just any sum.
Of course you would want to have a high rate of return on your investments. But understand what is in your control and what isn’t. How much you invest is in your control. How much you earn on those investments is under the market’s control.
As a long-term investor, and after identifying the goals you wish to invest for, first find out how much you need to invest through SIPs to meet those financial goals within your chosen timelines. You can use an excel calculator or talk to your financial advisor who can help you with it.

Planning to invest in small cap funds? Spread your risk via SIPs

Valuations have become cheaper, but investors should have 5-7 year horizon, say wealth advisors

Wealth managers are advising investors keen on looking at battered small cap shares to start systemic investment plans (SIP) in schemes that bet on these shares. Many of the small cap stocks have tumbled 50-70 per cent since January 2018, resulting in their valuations becoming cheaper; but analysts rule out an immediate broad-base revival with earnings growth showing no signs of recovery. SIPs in small cap mutual fund schemes would help investors spread their risk over a period of time.

“The sharp drawdown in small cap funds, is a good opportunity to add small cap funds. They can accumulate with a 5-7 years horizon,” says Deepak Challani, head -- third party products at Prabhudas Lilladher

Small cap funds have disappointed investors in the recent past. In the past one year, the category has lost 18.76 per cent, as per data from Value Research. The category has gained 2.2 per cent in the last three years and risen 12.96 per cent in 10 years. The Sensex has lost 2 per cent in the last one year and gained 10.43 per cent in three years. With the S&P BSE Small Cap Index losing 39 per cent from its peak of January 2018, fund managers say there is scope to pick potential winners.

“The selling pressure provides an opportunity for bottom-up stock picking, as this reflects a correction in the valuation multiples rather than any significant reduction in earnings profile for quality companies,” said Navneet Munot, ED, SBI Mutual Fund. “For retail investors, taking exposure via the SIP route is the ideal way to approach the current scenario as it cushions them against any knee jerk reaction in the market.”

A research note by SBI Mutual showed that 83 per cent of the stocks forming part of the S&P BSE Small Cap index are now down more than 30 per cent from their peak prices in the last 18 months. The note said that whenever the small cap index corrects more than 30 per cent, it bounces back strongly and has delivered 20 per cent on a compounded basis over the next three years.

However, distributors believe given that corporate earnings are slow to come back, investors should be in no hurry to invest, and should build their portfolio slowly over a period of time.

Some financial planners said investors should wait for the economic cycle to recover before investing in small caps. “Once you see a consistent recovery through better monthly data for at least two months in segments like auto, cement and flight bookings, you could opt for investments in such funds,” says Jignesh Shah, founder capital advisors.

When equity mutual funds offer negative returns, here’s what you do

The need of the hour is to stay insulated from the panic in the market.

The domestic equity market has been volatile over for quite some time now, and there have been numerous reasons for this - trade wars, liquidity crisis, economic slowdown, global recession risk and the list goes on. Given the volatile movement in equities, portfolios of many mutual fund investors, especially those who ventured into the market recently, are in the red, reflecting negative returns.

But even in such an environment, we are witnessing a steady investing behaviour, as highlighted by monthly SIP inflows. Retail investors put Rs 8,324 crore into the mutual funds through in July 2019, clocking the highest monthly SIP inflows ever.

At the same time, a few investors have turned cautious, as they are not used to seeing their portfolios going into red.

Warren Buffet once said, “the stock market is a device for transferring money from the impatient to the patient.” Markets tend to reward those investors handsomely who show conviction and stay invested. Investors must realise this is not the first time markets are correcting. In fact, market corrections are crucial for healthy uptrends in the times ahead.

The equity market has seen much more hiccups in financial and economic markets, including but not limited to the Harshad Mehta scam, Satyam saga, Mumbai terror attacks, Kargil War and 2008 global recession, but the rebound has always been stronger.

No wonder, S&P BSE Sensex has generated around 16 per cent returns CAGR for investors since its inception 40 years back, absorbing all such financial shocks.

The need of the hour is to stay insulated from the panic in the market and continue to stay invested. If you decide to redeem your investment at currently prevailing lower valuations, you are giving away your potential returns to another investor.

The market is currently trading at relatively lower valuations compared with those seen some time back. While it is not a good feeling to see portfolio valuations trend south, investors should focus on grabbing this opportunity to increase their investment exposure at attractive valuations, instead of thinking about temporary loss in their portfolios.

Since similar investments will now help you get a more shares at lower prices, it will help average out the cost of investment and equip you with the potential of higher growth when the market rebounds.

Staying away from the market in volatile times can cause a permanent deferral of investing, as volatility comes naturally to equity investing. As such, it is always desirable to make friends with it, rather than fearing it.

Dynamic asset allocation funds can help you maintain an active asset allocation for your portfolio, suiting current valuations and market sentiment. Following the simple investing principle of “buy low, sell high”, regular profits can be booked on investments trading at higher valuations and where the money is invested in an asset class and security at relatively inexpensive valuations.

Even when you stay invested in mutual funds, valuation-based portfolio churning by fund managers can help generate better returns for investors. As such, staying dynamic with asset allocation through asset allocation funds can be a great idea to turn the volatility wave in your favour.

Opening a mutual fund SIP can be another way of eliminating emotional bias from your investing journey. Since investments continue to be made irrespective of the market direction, investors continue to move towards their financial goals effortlessly. While negative returns might not be a desirable feeling to have in your portfolio, the long-term outlook for the market continues to be positive. As such, it is just a matter of time before your portfolio turns from red into green.

These are the times when your confidence in the market gets tested. Don’t let short-term market movements deviate you from the route to achieve your financial goals.