Magical World of Systematic Investment Plans (SIPS)

Systematic Investment Plans or more commonly SIPs are an evergreen investment option. This means that irrespective of where markets are, high or low, one can invest in them without bothering to time the markets. In such plans, an investor is supposed to invest money, usually a fixed sum, at a definite frequency (e.g. weekly or monthly) on a fixed day/date. This is a rational method of investing and takes away emotion, gut feeling and other biases involved in investing. These plans average out the cost of investment and thus eliminate the risk of a correction if a lump sum amount is invested at a high level. It also works well for investors who are periodic savers and do not have a large amount to invest in one shot.

However, one should remember a few important things while investing their hard-earned money through systematic investment plans.

• Discipline: One needs to invest a certain sum on a fixed date or day periodically in a consistent manner. It's important to meticulously evaluate periodic sums of investing and tenure without going overboard.
• Long Term Approach: Such products are inherently designed for long term investing. The more the time period (Ideal- Min:5year, Max: till your life time), the better it is as compounding takes its magical effect subsequently.
• Don't Pause or Terminate: Many investors pause or terminate their SIPs as they start timing the markets and investing biases start kicking in. This is a cardinal sin and should be avoided at all costs.
• Choose the Right Fund/Fund Manager/Stock for SIP: It's important to do your due diligence at the time of investing. Analyze different funds in detail. Understand the way an asset management company (AMC) operates, fund manager, his philosophy, experience, track record, and churning ratio among others. If you can't do it yourself do not hesitate to seek help from experts called Registered Investment Advisers ((RIA).
• Don't Shuffle Unnecessary: Some investors keep shifting their SIPs from one fund to another based on monthly or quarterly return performance. This is clearly avoidable. Analyze your portfolio once every year and try to understand the reason for underperformance before shuffling. Please note that every time you shuffle, your portfolio becomes cost and tax-inefficient.
• Diversification: Most mutual fund SIPs can be started with a sum as low as INR 500 or INR 1000. It's always prudent to invest in more than one SIP. However, it's equally important not to over-diversify as it becomes difficult to manage the investments. The ideal number of SIPs ranges between 3-5. Care should also be taken to diversify your SIPs between different investment strategies (Large Cap, Mid Cap, SmallCap etc).
• Be Mindful of the Cost structure: It is critical to examine the cost structure of your broker and the fund house before entering into any SIP as higher costs also compound over a period of time. If you have done the selection yourself or taken the help from an RIA you should always invest in a Direct Plan (preferably a growth option, unless you need regular income) as it saves substantial cost for investors.
• Potential Returns: SIPs are great investment options for long term investing provided we take care of the important things mentioned above. If we take a historical review of Sensex (Indian benchmark index of top 30 stocks) returns since inception (1979, 45 years), it has given around 15% average annualized returns. Herein, we paint various return scenarios over different time frames.

Assuming, INR 10000 investment every month or INR 1,20,000 every year:

It is clear from the above table that the greater the rate of return and time period, the greater the return on your invested money. It works magically over time as compounding benefits kick in. Such investments are ideal to meet your retirement goals or education/wedding goals for your children. The earlier you start, the better it is. Although there is never really a bad age to enter into SIPs.
Some good Mutual Funds to Invest are:

1) Parag Parikh Flexi Cap Fund
2) Quant Flexi Cap Fund
3) Nippon India Large Cap Fund
4) Motilal Oswal Mid Cap Fund
5) Quant Small Cap Fund

Please note that this list has been prepared using authors individual analysis and assessment. Please exercise your own due diligence as well. As they say 'better late than never'. The right time is NOW to enter the magical world of Systematic Investment Plans. So, don't wait, start investing!!