The economy has seen it all and thrived nevertheless and thus investing is a long-term game and should be treated accordingly.By P Saravanan
Systematic investment plan (SIP) is the most comfortable and convenient ways of investing in mutual funds and creating long-term wealth. It enforces the habit of disciplined investing and ensures the benefits of rupee-cost averaging. However, sometimes SIPs can also make losses subject to the market and associated risks involved. What should an investor do then? Should he stop or withdraw a loss-making SIP or keep the SIP going? These are questions that trouble investors. Let us try to find answers for the same.
Asset allocation
This is a very important aspect of the SIP investment. The returns generated from equity-linked mutual funds are a function of the stock market. So, if the market itself is generating not a very lucrative return, then your fund is also likely to follow the trend and provide subdued returns. Again, within equity, parking most of your funds into small or mid-cap funds just because past year returns were very good is not a good idea. Allocate your assets in a diversified manner. Preferably, it should be a mix of long-term, mid-term and short-term funds. This choice varies from person to person as everyone has a different set of risk appetite, financial goals, etc. Limiting your investments to only one type of fund is definitely not a very good idea. Take care of your risk appetite while you make investments.
When to withdraw
This is the most commonly asked question by investors. The answer to this question is purely based on your fund performance. Track the performance of the fund you have invested in. If the fund is on a low performance for less than a year, that might be the market fluctuation affecting it but if the performance is unsatisfactory for more than eighteen months, consider looking for a better fund.
However, this is not the only parameter while mapping the performance of a fund, you should also check the composition of companies in which the fund has invested and their prospective performance. Another good strategy at this point is to check your mutual fund’s performance with similar mutual funds. So be diligent when you make the decision regarding redemption of your SIPs and identifying alternative funds.
Investment horizon
In fact, SIPs and investment horizon go hand in hand. The longer one stays invested in the SIP, the better are the returns. Generally, consider SIPs with a minimum investment of five years or so. Empirically also it takes at least five years to average out the losses and market risks and the power of compounding acting in the back. A market correction phase does not mean a need to redeem those funds. Rather, take it as an opportunity to buy more funds at a lower price.
To conclude, one could possibly lose money in mutual funds but there is no need to have a knee-jerk reaction and make a hasty decision on seeing your portfolio in red. The reason for such a result could be due to events such as elections and geo-political tensions, recessions, pandemics, etc. The economy has seen it all and thrived nevertheless and thus investing is a long-term game and should be treated accordingly.
(The writer is a professor of finance & accounting, IIM Tiruchirappalli. Views expressed are personal.)
SIP SCORECARD
- Do your homework before deciding on redemption of your SIPs and identifying alternative funds
- Continue SIP for at least five years to average out losses & market risks & get the power of compounding
- Check the composition of companies in which the fund has invested and their prospective performance
- Check your mutual fund’s performance with similar mutual funds
- A market correction phase does not mean one needs to redeem, rather buy more funds
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