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Why Most Mutual Fund SIP Strategies Fail - Outside View by PersonalFN

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Why Most Mutual Fund SIP Strategies Fail
Sep 18, 2017

When it comes to making smart financial decisions, investors can be their own worst enemy.

The impact of behavioural biases on investing is so well documented, yet, investors repeatedly tend to give in to certain prejudices.

Often financial decisions are skewed by what grabs your attention. Unfortunately, what's freely available may not always be in your best interest. Nonetheless, investors are often influenced not only by the media, but by what other investors are doing as well.

Over the past few years, as equity markets have soared, so have mutual fund accounts. Counting on the double-digit returns, investors have flocked to the market through mutual funds. And almost every month, equity mutual funds are reporting record inflows.

As a wise choice, many have invested in mutual funds through Systematic Investment Plans (SIPs). In July 2017, SIPs contributed as much as Rs 4,947 crore. This is a significant amount, considering mutual funds invested Rs 11,800 crore in equity markets in the same month.

This brings us to the question: How many of these SIPs have been started with a specific purpose or with a financial plan in place?

The numbers may be depressing. Therefore, what seems as a wise choice may not hold true as time passes by.

Why is this so?

PersonalFN has identified five reasons why a mutual fund SIP strategy may fail.

Read on to find out...

  1. Impulsive SIPs

    Following the herd is a behavioural bias often leading investors astray. It refers to how an individual thinks and acts in the same way as the majority of those around them. Investing through SIPs may look like an attractive investment route, however, ad hoc investment decisions may not make the optimal use of your financial savings. Hence, you need a plan for your SIP investments, which should have a specific purpose, aimed towards clearly defined financial goal.
  2. Inadequate investment

    Many randomly invest Rs 1,000 or Rs 5,000 per month even when they could invest much more. The right investments happen only when your financial goals are set in place. The investments you make should be relative to your income. Always look at ways to make optimal use of your financial savings, in the best possible way. If you have set up a SIP of Rs 5,000 per month running over multiple years, as your income grows through the years, so should the SIP investment. You may also start SIPs in another set of funds that meet your investment objective. What this means is, your SIP investment strategy should be dynamic; one that is responsive to changes in your savings and financial goals.
  3. Excessive / Lack of diversification

    The key to superior investment performance is adequate diversification. The funds you invest in should provide suitable diversification across market capitalisation and investment styles. If you invest only in large-cap funds, the SIP portfolio will lack diversification, leading to sub-optimal returns. On the contrary, if you invest in 20 different funds, the excessive diversification will dilute returns. This is why you need to set a portfolio of 4-5 mutual fund schemes that have a fair allocation toward different market-capitalisation and sectors. A mix of value and growth strategies, too, will help optimise returns
  4. Improper asset allocation

    One solution to managing investment risk is maintaining the right asset allocation. The consensus is that youngsters, who have a longer investment time horizon, should invest a high proportion of their portfolio in equity. And as you grow older, the allocation to equity should reduce, while increasing your allocation to debt investments. At the same time, the portfolio needs to be tactically aligned to deal with the market conditions. Therefore, if the market is extremely overvalued, you may need to reduce your exposure to mid-caps and shift value to opportunity or balanced funds. Thus, your SIP investment strategy should not ignore tactical asset allocation, which can protect you from risk in a market downside and enhance returns when the market soars.
  5. Picking the wrong funds

    Often, the question on most investor's minds is, 'Which is the best mutual fund to start a SIP?'. Identifying the right fund is a science as well as an art. This is because choosing the right fund should be based on scientific quantitative parameters, coupled with the knack of evaluating the fund on qualitative factors. Unfortunately, many investors get carried away by star ratings. The sad part is that most rating agencies focus on quantitative parameters such as returns, risk-return trade off, corpus size, portfolio turnover, etc. However, qualitative parameters such as the fund manager's experience, investment system and processes, among a host of other factors are equally important. Hence, adopt a holistic approach to identify funds for your SIP investment strategy. This will help you generate superior and efficient risk-adjusted returns.

The psychology of the average investor almost guarantees under-performance. While SIPs in mutual funds help to deal with behavioural biases to an extent, construct a SIP strategy that can optimise your returns.

This is why you need to invest in a SIP-worthy portfolio. A portfolio, where the funds are picked using PersonalFN stringent scoring model, ensures that each scheme is tested on various quantitative as well as qualitative parameters.

Additionally, the mutual fund schemes pass through a rigorous assessment for their SIP-worthiness, that is, PersonalFN assesses how consistently these funds have performed under SIP during multiple 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. Subscribe to the report here.

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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