A systematic investment plan (SIP) entails regular investment in a mutual fund. SIPs are powerful because they sync with your income flows and also offer the benefit of rupee cost averaging (RCA). That means when the NAV comes down you get more value and when the NAV goes up you get fewer units. As a result, over a longer period of time, this volatility works in your favour. That means your average cost ends up being lower than a lump sum investment.

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But SIP is not just about starting regular investing in a fund and sustaining it. There are a lot many nuances in SIP investing. Let us look at a few such nuances that can help make the SIP a more powerful tool for investors.

Strategies to maximise gains from your SIP

An SIP works best when you are invested in equity funds. SIPs on debt funds may not add much value because the power of compounding works a lot better on equity funds. It is only in equities that time works better than timing and hence the focus of your SIP should be on equity funds.

SIP should be regular and sustained. Ensure that you do not miss a single SIP. Once you start an SIP, don’t stop it in between. When you stop in between the entire compounding gets disrupted. Unless it is an absolute emergency, you should not disrupt your SIP. More important keep the SIP as rule-based as possible. Don’t try to time SIPs; that is not the purpose.

Ensure that SIPs are always aligned to your goals. For example, as you progress with age your risk appetite comes down and so should your equity allocation. At some point you will find that your SIPs in equity are actually redundant to your asset mix. The answer is to shift from equity SIP to a debt SIP or even a liquid SIP if warranted.

Your SIP duration should typically depend on the tenure of your goals. Goals can be long, medium or short term so accordingly, you should allocate funds to it. Avoid SIPs in thematic funds or even in sectoral funds. Long cycles of these sectors and themes can result in underperformance over prolonged periods of time.

Prefer a stepped-up SIP if you cannot monitor your SIP amounts on a regular basis. Normally, your income increases on an annual basis, barring a few exceptions. What you need to focus on is that you step up the SIP such that each year you increase your investment in sync with your growing income.

You can opt for a growth plan or for a dividend plan of SIPs. A growth plan results in automatic reinvestment of returns and that is called auto compounding. In the case of dividend funds, you have to ensure that the dividends are invested at the same yield. That never happens in practice. Also, dividends are inefficient in tax terms as they tend to attract dividend distribution tax and that reduces the effective returns.

Redemption of SIPs is advised when the goals are approaching. However, you need to plan the redemption of your SIP in a smart way. For example, if you redeem in one shot then you pay 10 percent on capital gains in excess of Rs 1 lakh per year. A better choice will be to spread the redemption to claim the benefit each year. Also, you can structure it like an SWP so that you systematically withdraw the SIP and also make it more tax efficient.

A very basic issue of making SIPs effective is to tag SIPs to goals. If you have 5 goals, then don’t try and spread across 25 SIPs. That is just too complex to handle. Stick to 6-8 SIPs at best but ensure that each SIP is specifically tagged to specific goals. It will ensure that the purpose of each SIP is clearly known.

Review your SIPs on a regular basis; ideally every year. Ask basic questions like; are the funds held by you outperforming the peer group, are they consistent, do they better the index etc. This review can give you useful insights to take a view on which SIPs to continue and which ones to either shift or terminate. If you are stuck in a bad SIP, you don’t have to be stuck forever. That is what rebalancing is all about.

SIP is a great product but the onus is on the investor to make it work better. SIP makes money work hard for you but it is in your hands to ensure that SIPs work continuously in your interests and in the interest of your long term goals.

Sandeep Bhardwaj is Chief Sales Officer at Angel Broking Ltd.

First Published:Sept 27, 2019 6:00 AM IST