Conventionally, any recurring and periodic investment done in financial products, like Mutual Funds, Stocks etc, is considered as a Systematic Investment Plan. However, this approach doesn’t take into account a holistic view of the overall investing journey. Here is an unconventional, and more useful, meaning of Systematic Investment Plan. Please follow the steps below to create one for yourself:
Figure out your plan/goal - What is the purpose of your investment? To grow your wealth, or to protect it? Or maybe to use it towards a specific expenditure in a few years?
Whatever we do in our life, the goal/purpose/objective should be well thought of. Else, we are doomed to wander in randomness.
Set a target amount for the goal. For example, a goal to buy a car worth Rs. 10 lakhs!
Set the time horizon to achieve the above goal. In how many years do you want to own that car? 3 years? 5 years? This is the time period for which your investment for this particular goal should be done.
Further, keep one thing in mind - equity investments should be for the long term. Now, to make sense of that long term, look at the past 18 years' data. In any 10 year rolling period, the worst performance of Sensex is 8%, which is even higher than the average post tax returns on Fixed Income. Please note again this was the worst case. (Refer to source here: How risky is investing in the stock markets after all? )
Assess your risk profile to check your own risk taking capacity. Otherwise, you will be either taking too much risk (higher exposure to stock market/equity mutual funds) or too less (higher exposure to fixed income like FDs, debt mutual funds, endowment plans etc.). For example, a typical Moderate risk profile portfolio would have 60% in equity and 40% in debt.
Asset Allocation i.e percentage of money that should be invested in each, equity (Asset type - risky but higher returns) and fixed income/debt (Asset type - safe but lesser returns), based on your risk taking capacity and time horizon to achieve the goal. For shorter time horizons, invest more in debt. For longer time horizons invest more in equity. However, don’t exceed your risk tolerance while doing so.
Select the best funds for each asset class. Run an in-depth analysis to come up with a list of consistent mutual fund out-performers with the best returns. This list should be monitored and should be updated over time. It is advisable to invest in well diversified funds only, and leave the allocation in different sectors (like Banking, FMCG, Health etc.) to professional fund managers.
For example, a typical moderate risk profile portfolio might have the following funds today:
- Birla SunLife MNC Fund (Equity)
- ICICI Prudential Value Discovery Fund (Equity)
- Kotak Select Focus Fund (Equity)
- Reliance Medium Term Fund (Debt)
- Birla SunLife Short Term Fund (Debt)
You may get confused with the star ratings that can be found in so many places. For example, a fund might be a 5 star at one place, but it may be a 2 star somewhere else. Also, a 5 star fund can be a 3 star fund after 3 months. This is because different websites follow different strategies in rating the funds. Therefore, whatever mutual fund selection strategy you come up with, back test it to see the results. It is very important to stick to your strategy and not get distracted by others.
As a rule of thumb, look at long term returns (7 years or above) and select the ones with consistency of out-performance to get the best returns.
Start investing in your goal to achieve it! This is a critical step because the majority of people just day dream about their goals. Therefore, it is important to overcome your inertia of actually starting/implementing the plan. The investment frequency should match with your cash inflow (example: monthly for a salaried person).
Stick to the plan - Periodically monitor your goal path to check if you are on track to achieve it. If you are off-track, then analyze the problem (for example, you missed investing in a particular month) and do the course correction (for example, putting the missed investment amount in the goal) to bring yourself back on track to achieve the goal.
Re-balance to keep yourself on track:
- Review funds periodically, and switch if necessary, to keep yourself invested in the best performing mutual funds according to your strategy at all times.
- When the market moves up/down substantially - bring yourself back to your appropriate asset allocation (for example, back to your 60:40 ratio).
- As you start approaching the end of your goal, gradually start moving money out of equity to debt mutual funds in order to decrease risk and uncertainty.
Goal achievement - Hurray! You now own the car :) The success of this plan hinges upon one fact - that you do not become your own enemy in this investing journey. You need to think thoroughly about your plan, and then execute it meticulously, without bringing your biases/emotions (in times of markets going up/down) in between the process.
It may require another reading to understand that what you have just done is created the best Systematic Investment Plan, which is totally customized for yourself. If it sounds like a lot of work, that is because it is. But then, doing anything worthwhile takes time and expertise!
In case you don’t have the necessary time and expertise to do this, you can take help from a certified financial adviser, or give Goalwise a try to do it for you.
Looking forward to your achievements!