Since I wrote about not following SIP about a year ago, I have had many discussions in the blog and in Facebook groups such as AIFW on the subject. A lot of people have tried to convince me why SIP is a right method, despite the concept being completely inadequate for equity as an asset class. I will not go into the arguments or counter arguments as it has been done and dusted as far as I am concerned – if you are interested go through the different posts in the blog.
However, the other important point many point out is the availability of money to take advantage of the drops in the markets. The argument goes like this – ” It is all very well for you as you have enough money to spare. We get a salary every month and if we do not put the money in SIP, we will probably spend it.” Now, I find it difficult to understand why any person cannot show some self discipline, but that is unique to each person. I was quite happy to see that a reader of my blog asked me a more pertinent question – she wanted to know how she could invest in MF more productively. Having done SIP for 2 years and read my posts she could see that there was enough case to not do SIP in MF.
To give some basic background, this reader lives in Mumbai and works in the advertising industry. Her monthly take home is about 1.5 lacs and she was investing 40,000 per month through SIP in 5 Mutual fund schemes. Over 2015 and 2016, she could see that her nearly 10 lacs invested in these funds have not done greatly. She could also see that there were several times she could have put in money, had she not been doing SIP. Now apart from MF, she also wanted to do 1.5 lacs in PPF annually. Based on this data, I have given her some alternative plans which she can look at in 2017.
- Firstly she needs to fix the index levels aligned to her funds at which she wants to make a purchase. For example, in Nifty the right level currently will be 8000 and below. This may happen in Jan/Feb and a couple of other times in the year.
- In order to have the money available, avoid putting in the 1.5 lac in PPF in the beginning of April.
- As and when markets fall put in the money for MF buying. Look at having 4-6 purchases in the year.
- She could just keep the money in her savings account but there will be a temptation to spend and also the interest is low.
- A better way will be to put 12500 per month in PPF, unless you are buying MF that month. If the markets are high you can put more. For example, if you are clear that April is unlikely to be a good month for buying MF, put that amount in PPF.
- In general, put your SIP amount in an Arbitrage fund with dividend option. You will get decent returns and can shift money from it to buying MF whenever needed.
- Another way will be to put the money in Liquid fund or some other type of debt fund.
- The above addresses the issue of parking your money, so that you do not get tempted to spend it. At the same time, you do not buy equity MF at the wrong time.
How has it worked out for the reader in this month?
- She understands that a level of 8000 or lower in Nifty will be a good buy for her large cap fund but at 8250 etc she is not interested to buy.
- She has put the amount of 40000 in a Liquid fund along with the amount of 30000 which she used to save for PPF.
- In case Nifty consistently stays above 8000 till February beginning, she will put the money once again in the same Liquid fund.
- At the beginning of each month have an idea of the Nifty level at which she wants to buy. It is all right if it does not reach that level, she will avoid buying.
- Worst case scenario can be for Nifty to go up consistently through the year. This is unlikely and even in such a case she is anyway taking a monthly call.
- I think it is very probable that she will buy her units at Nifty level of around 7900 this month itself or the next.
It is a rather simple system which anyone can adopt. Remember, her salary is not an issue here – people having lower or higher salaries just need to scale the model down or up. Do you want to do this? Only you can answer that – if you want your money to work in a more productive manner, consider it seriously.