Avoid Complicated SIPs

Keep it Simple!

The financial services sector in India is known for making simple things complex. The hidden agenda is to confuse the common investor, because it is difficult to convince them on wrong products. We can see complex insurance policies and specially bundled equity investments to confuse an ordinary investor. They will offer guarantees, which may not even match the cost that you are paying for!

Systematic Investment Plans (SIPs) are supposed to be the simplest and straight forward investment for retail investors. Here, you invest a prefixed amount every month, irrespective of the market conditions. You will get more units, when the markets are down and will get fewer units, when the markets are up. What you have to do is to identify a good fund, decide the amount of SIP and start it. Later you need not worry about the daily market movements etc because, you are investing for a long term goal and the fluctuations will average out easily. Review of the fund performance once in a year is more than enough.

But, the mutual fund industry is now complicating things to confuse the investors. There are Daily SIPs, weekly SIPs, Flexi SIPs etc. on offer. Given blow are some complex SIPs offering superior returns than the normal SIPs!

1. SIP which allows you to invest less, when the market goes up and invest more when the market falls. So, every month the amount of SIP will change, as per the market level.(Value Averaging)
2. SIP where you have to decide a minimum and maximum range and can decide the amount of SIP every month within this range, depending on the market conditions.
3. SIP which decides the amount based on the preset trigger levels.
4. SIP which allows you to increase the SIP amount after a particular period. Say, you start with an SIP of Rs. 3000/- and after 6 months, the SIP will be increased to Rs. 5000/- etc.

Except the last option, where you can increase your SIP, as per your affordability, all others are just not worth the pain. It makes sense to go for a simple monthly SIP.

What is to be done?

1. If your financial goals are within 3 years, go for Debt funds only. For goals within 3-5 years, go for balanced funds.
2. If you are a long-term investor who invests in line with your asset allocation and have a time horizon of atleast 5-7 years, keep things simple and go with a traditional monthly SIP in good mutual funds. If you are having multiple SIPs, you can select different dates of the month like 5^th 10^th, 15^th etc. for different SIPs. This will be the ideal way to save for your goals like Retirement Planning. Don’t go for more than 5-6 funds. Instead of diversification, it will add duplication.

Don’t Stop SIPs, when market fall

This is the biggest mistake, people do with SIPs. You will stand to benefit, when you are continuing your SIPs during the volatile markets. Those who continued their SIPs during the 2008-2010 periods were benefitted with the volatility. Don’t forget to systematically transfer from equities to debt around 3 years before the financial goals.

It is a marketing strategy

Introduction of complex SIP is a way to sell some funds which are not performing. Once, the salesman confuse you with the excellent methods adopted by their company in deciding the SIP amount, you may forget the most important thing – the long term track record of the fund! Actually, this is the most important criteria, which you have to consider while selecting a mutual fund.