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Your 5-Point Checklist For An Effective SIP Investing Strategy - Outside View by PersonalFN
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Your 5-Point Checklist For An Effective SIP Investing Strategy
Sep 14, 2017

"We need a different strategy for overcoming failure, one that builds on experience and takes advantage of the knowledge people have but somehow also makes up for our inevitable human inadequacies. And there is such a strategy - though it will seem almost ridiculous in its simplicity, maybe even crazy to those of us who have spent years carefully developing ever more advanced skills and technologies. It is a checklist."- Dr Atul Gawande, author, 'The Checklist Manifesto'

Checklists are simple list of elements to reinforce a process and to ensure that procedures are repeated with the same level of quality, so that nothing is missed out.

This is why airplane pilots run through a checklist before take-off. There can be dire consequences if a pilot inadvertently overlooks key indicators. Likewise, an investor can face negative consequences, in the form of poor returns or capital losses, if investment mistakes are made.

Thus, a checklist of the key essentials will make it clear where there are inefficiencies and what can be improved and changed to make a process more efficient.

Therefore, in all areas that involve complex processes, from engineering to investing, the value of a checklist cannot be ignored. Many outstanding investors such as Philip Fisher and Charlie Munger have been using checklists for years.

Even when it comes to investing in mutual funds via Systematic Investment Plans (SIPs) a checklist can prove beneficial to your long term financial wealth.

Can a simple checklist for starting a SIP in mutual funds enhance your returns? Sure, provided it's done diligently.

Below is a simple-to-execute 5-point checklist to enhance your mutual fund SIP strategy:

  1. Purpose of the SIP investment

    PersonalFN cannot emphasise enough the importance of setting specific financial goals. While the task may seem rudimentary, it serves multiple purposes. First, it gives your investments a direction. You know how much needs to be saved every month towards a specific goal. Second, it adds an emotional value. Investments made in a haphazard manner, serve no objective, and so you do not have any emotional attachment to them. But when you set out with a purpose in mind, you ensure the desired goal is achieved. So, before you start a SIP, make sure you check this off the list first.
  2. Tenure for SIP in equity funds spans over five years

    Most investors opt for SIP in equity funds as it helps to tide over market volatility. While this is true, it is essential to keep a long-term investment horizon. Most distributors, just to get investors enrolled, suggest a SIP for tenure of 1 year. However, such short-term investments in equity will not be beneficial to your financial health. Thus, the tenure of your SIP in equity funds should match the investment horizon of long-term goals that span over five years. This will not only ensure that you are able to average your cost across market cycles, but will also give you the benefit of compounding.
  3. Asset allocation conforms to risk profile

    It is common to see investors chase performance. That is, they flock to schemes that are among the top performers, paying little heed to the risk involved. While equity funds may have generated the best returns over the past few years, don't ignore the risk involved. Hence, it is essential to strike the right balance with equity funds, debt funds, or hybrid funds when devising your SIP strategy. Even within each asset class, ensure the funds are well-diversified across sectors and market-capitalisation. Thus, your equity SIP portfolio should contain a fair proportion of large-caps and mid-caps, as well as growth and value-styled schemes.
  4. Funds picked using stringent rating parameters

    As mentioned earlier, investors rush to top performing schemes and 5-star rated funds. There may be no doubt that such schemes have performed well in the recent past, but as caution rings, past performance is not an indicator of future returns. Thus, apart from quantitative factors, the fund needs to be rated on qualitative parameters as well, which has a higher probability to judge whether the past performance is likely to continue. Well-managed funds coming from a process-driven and investor-centric fund house are expected to continue their good performance in the future as well. Hence, when shortlisting mutual fund schemes to SIP in, ensure that the scheme meets stringent quality guidelines as well.
  5. Invest in direct plans

    In the investment world, you need to pay heed to costs as well, especially when you are investing for the long term. Though the costs may seem insignificant, ranging from 2.50%-3% per year, over time, it can work out to lakhs of rupees. Hence, even a reduction of a few percentage points in cost can add significant value to your portfolio. Direct plans of equity funds charge a fee that is 0.50-1 percentage point lower than regular plans. This small difference in costs can result in savings of anywhere between Rs 8-17 lakh over 20 years, on a Rs 10 lakh investment. Every 0.25%-point reduction in the expense ratio works out to an additional earning of Rs 4.50 lakh in 20 years' time, if Rs10 lakh is invested. Thus, when starting a SIP for the long term, ensure you opt for a direct plan.

PersonalFN hopes this checklist will help improve your SIP strategy. All you need to do is dedicate a little time and effort to get your investments on track.

While most points on the checklist are easy to follow, most investors may get stuck on the fourth point. How does one select quality funds? This is where you can benefit from PersonalFN's decades of experience in mutual fund research. PersonalFN rates funds on stringent quantitative and qualitative guidelines before recommending them to subscribers. And the track record speaks for itself - beating the market by a whopping 70%.

However, when it comes to picking funds that are SIP-worthy, a detailed analysis is required on how the fund has performed under SIP across multiple market conditions and timeframes.

Well, the wait is finally over.

PersonalFN has launched the Exclusive Report on SIP-worthy mutual funds - The Super Investment Portfolio - For SIP Investors.

After our rigorous shortlisting process, we go a step ahead when picking funds that are SIP-worthy. Under this, PersonalFN conducts a detailed analysis on how SIPs in the top shortlisted funds have performed, across multiple market conditions and timeframes. Only those funds that successfully pass this evaluation are chosen.

Don't miss out on early bird discounts. Click here to Subscribe to the report now!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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