The last two posts in the blog have really generated a lot of heat and dust in the form of comments and feedback, much of it supportive but some of it virulently critical. Many people have accepted that the standard way of doing SIP has serious flaws, but at the same time they found my method a bit too complex for their liking. I understand that it is not every person’s cup of tea to look at fixing the base level of Nifty or some other index every month. I have therefore come up with a far simpler plan that can be implemented by any investor, without any great effort or knowledge requirement.
Before I get to the plan let me state a few background assumptions that are important for it. As I will explain, most of these assumptions occur naturally for all investors, it is just that we need to be aware of it.
- An investor invests in both equity and debt every month. Equity is through the SIP route in an Equity MF portfolio, debt is in debt instruments. For simplicity let us assume PF and PPF are the only debt instruments that he has.
- Let us say PF is 12500 per month, PPF is 12500 per month and Equity MF through SIP is 25000 per month.
- SIP date is 7th of each month when 5000 is invested in the MF portfolio that has 5 funds.
Now let us see how the investor can have an alternative to his standard SIP. I will assume that he is looking at a 1 year investing period between October 2015 and September 2016. This is how it will work in practice:-
- First of all stop the automated SIP on the 7th of each month.
- In October, invest 12500 in PPF as usual. Starting from 1st October till 20th or so, look for any day when the Nifty falls to levels close to 7800. Trust me, there will be such days in all likelihood, especially with the quarterly results not likely to be great. Just in case there are no such days, then between 21st and 30th look for any day where the Nifty level is lower than what it was on 7th October. Invest in these days.
- Assuming all of it does not happen at all then put your 25000 reserved for equity into PPF. Once your PPF allocation is over, you can use Liquid funds or just keep it in SB account.
- Whatever level of Nifty you invest in a month, make that the base level for next month and try to buy at a lower level than that. Do not worry if you cannot buy for 2-3 months, over a year there are bound to be days and longer periods when the markets will correct heavily, either for fundamental reasons or on some negative news flow.
- In this method you are buying MF at progressively lower NAV, which is basically the condition where SIP works best. Unfortunately, because we do SIP on a specific day, irrespective of the market levels we do not usually get this to our advantage, or even if we do it is only a matter of pure coincidence.
- There is really no need to buy equity every month, though regular investment is a good practice in general. Returns from equity are dependent on what level you buy it at not on which date or month. I would rather buy an MF at an NAV of 20 in January, rather than buy it at 22 in November.
- Debt on the other hand, is dependent on the time of investment. So by not investing in equity when markets are high and putting that money in debt you are creating two benefits for yourself. Firstly, you retain the chance of getting equity at lower prices, secondly your money in debt is earning returns for you.
- I think you can work out the details now, you have got the basic principle.
The only scenario where this will not work is if the markets keep increasing every month and you are left in a situation where you are never in a position to buy MF according to the above process. But you will agree that it is almost an impossibility for this to happen. The market will always give you opportunities to invest, you just need to be patient and have a method that works.
Try it for a year and you’ll see you have done better than the standard SIP route.