An alternative to standard SIP – why and how

I have written several posts on SIP investments in MF now and most of the issues are really discussed. Readers interested in those can search the blog if they are interested in reading them. A question that many have asked me is why I do not favor the standard SIP and in that case, how do I then plan to invest in Mutual funds. I wanted to address both these issues here.

Let me first state that I do think MF is a good investment vehicle for people who do not have the time or inclination to invest in direct stocks. Even for people into direct stocks, my opinion has always been that you must have an MF portfolio as it is far easier to deal with goal based investing through this. Stocks are like the icing on the cake for many of us, you can generate great long term wealth through it.

The issue really is that equity MF have stocks as the underlying asset and, one you understand this, it is very clear to see why the route of standard SIP is clearly not the way to go. Face this – would you ever buy a stock on a particular day of the month, irrespective of the price? Of course not and you are probably now thinking there is something seriously wrong with me!! Yet, you think nothing about doing exactly the same for MF units? A lot of the SIP dates are in the first 10 days of the month as it is the time when all salaried people get their cash inflows into their banks. That may be convenient for the MF distributors but do remember that the stock markets do not care about these dates. Sure you may get lucky and buy your units at a low price if your SIP date coincides with a downturn in the market. However, what is the real probability of that? I would say very low. And now, what is the probability of this happening over 120 months if your SIP is for 10 years? I am not a statistician but the probability is pretty much zero.

However, whenever this discussion comes up, people invested in SIP simply refuse to accept it due to the endowment effect – we like what we have and are not keen to change. Well, I too have been a victim of this since 2008. For the last 7 years I have religiously invested in the standard SIP, month on month. I did supplement it with some one time investments but essentially SIP was the basic MF investment. It is only when I started the blog that I started to think deeply on this and was able to understand that it made very little sense to do it the way I was. The proof of the pudding is always in the eating – so I decided to do a performance analysis of my SIP investments since October 2013. I had written about this in my last post. Interestingly ICICI Focused Blue Chip which is a large cap fund, had given an XIRR of 14.69 % over 2 years. Pretty good you’ll say, till I realized that Nifty had given returns of 34 % in the same period. I am sure that had my SIP been on some other days, the results may have been a tad different. I am sure you get the point though.

Enough said – the standard SIP is pushed heavily by a lot of people selling it because it suits their interest. As an investor I have to look into my interest and it is not being served well by the standard SIP. There are a few different ways to achieve this – take a look at some of the possible ways:-

• One way is to reduce the standard SIP amount by 50 % and invest the rest on a day where the level of the relevant index falls sharply. Use Nifty for Large cap, Midcap index for mid caps etc.
• You can also just keep checking the 200 DMA of the relevant index and invest on a day when you see it fall lower than this. Do not worry if the market is rising, it will always have days of correction.
• If you cannot invest every month, it is no big deal. You would rather invest 2 months late if the NAV is 20 Rs instead of 21.5. Remember for equity investments, time you buy is irrelevant, the level that you buy it in is.
• If you are looking into investing in both debt and equity, managing this is fairly simple – invest in debt when you do not want to invest in equity and vice versa.

So far so good, but what exactly will I do for investing in MF myself? I am working on a plan as I need to put that into operation from November. Hopefully, I will be able to share it in a post this week.