We have said in our last blog that SIP works when you have less than 40,000 monthly saving but you need to do in it right way to benefit from it. There are 4 things you need to get right. We call it the Power of 4.
Power 1. Diversify across Process – Value, Momentum, Quality & Size to ensure the benefits of right diversification.
One of the biggest advantages of investing in mutual funds is diversification. Diversification reduces risk. Investing in a fund enables you to invest in multiple stocks – this is one level of diversification. However, this is not adequate. There is one more dimension of diversification that you need – diversification across investment strategies.
Every fund manager tends to have a natural inclination/expertise for a particular Process. Outperformance of a fund is due to a Process or method of selection of stocks with similar characteristics. However, a particular process works well only in a certain market situation but not in others. Over longer term, 10-15 years, all of the above processes beat the market, hence you will see that SIP done for very long periods seems to work.
Why then diversify?
Your goal in SIP is not to earn very high, index-beating returns. You goal is to earn substantially higher than inflation rate and FD interest rate on all the saving that you generate monthly. Continuing to invest and staying invested for long, letting your money compound at this healthy rate is what you need to do. However, it’s easier said than done.
The main reason for investors exiting prematurely is discomfort/panic when their portfolio corrects more than they can stomach. For SIP to work you need to continue buying when the market and the fund has corrected because only then you will get a lower average buying price. Without this SIP does not work.
Diversifying your portfolio across processes ensures that at least one fund is working well at all times in the market. This will reduce the downside volatility on your MF portfolio and help you continue investing for the long term which is critical for success in investing. Hence, it is prudent to invest in all the key processes without worrying about a certain process going out of fashion in the short term.
Through MoneyWorks4me SmartSIP we recommend funds with 4 key and different Processes to ensure right diversification, reduced risk and to help you stay invested:
- Momentum – has worked best in rising markets
- Value/Dividend – in flat or falling markets
- Quality – in tough/bad economic conditions
- Size – in good times.
Power 2. ‘Andar-se-Strong’ Funds to help you ride through tough times
Most of the industry relies on selecting funds that have delivered highest returns in the past. This is like driving a car looking at the rear view mirror. This selection criterion can be misleading, inadequate and risky. Misleading, because it has the biases of when you started and how the markets are doing at the time of measuring the performance. It’s inadequate because it does not tell us how much risk the fund manager is taking and whether the fund is likely to perform in the future, the period we are interested in. It’s risky because funds that give the highest returns today are likely to have stocks that are overvalued and to correct or stagnate.
So how does MoneyWorks4me SmartSIP select funds?
We stress-test funds based on two criteria – Portfolio Quality & Consistent Performance (Rolling returns). For details read, How do you select the right Equity Mutual Fund to invest in?. Funds that pass our stress test have the necessary strength i.e. they are ‘andar se strong’ to ride through the tough times and also recover fast. This method ensures funds with risky stocks in their portfolio and inconsistent returns performance are never recommended. They are also likely to perform better than others when the markets favour their Process. So with SmartSIP you get the Power of ‘andar-se-strong’ Funds.
Power 3. Low Cost Plans to Enhance Your Returns
Regular Plans are very expensive on the investor pocket. But few realise it until the math is explained to them. Let’s look at an example. If you invested Rs 10,000 per month for 20 years in Regular Plans you will earn Rs 99.9 lacs (returns assumed 12%) versus Rs 1.15 crores in Direct Plan (returns assumed 13%) i.e an additional Rs 14.6 lacs. Even after reducing the effect of fees you would pay for getting the investment advice the difference will be more than Rs 10 lacs.
The difference is even higher for higher SIP amounts. In addition to Direct Plans, MoneyWorks4me SmartSIP recommends funds that have a low expense ratio and no/low hidden cost. Read Avoid Mutual Funds with Hidden Costs for a deeper understanding. A low cost ensures higher returns for you. With SmartSIP you get the Power of Low Cost.
Power 4. Get Zero-conflict Advice
Things are always changing and hence the fill-it-and-forget-it passive way of SIP investing does not work. Nor does reacting to every change. So you need advice you can trust, advice that is from a zero-conflict-of-interest advisor. So when you are advised to make changes (stop, switch and sell) in your SIP portfolio you can rest assured it is in your interest, 100%. MoneyWorks4me has been fiduciary (no conflict of interest) research and advice provider for 10 years now. With SmartSIP you get the Power of Zero-conflict Advice.
To do SIP the Right Way get the Power of 4 now with MoneyWorks4me SmartSIP !!
So, now you know how to build a winning SIP portfolio. But what if you already have a SIP portfolio and are not sure if you have invested in the right mutual funds. The ‘Sher ya Billi’ tool by MoneyWorks4me helps you find the answer to your question-will your mutual fund portfolio disappoint you or make you happy? The Sher-ya-Billi Tool helps you know the important risks in your mutual fund portfolio-the ones that could and probably will adversely impact your portfolio’s performance.
Read our next blog to find more details on the Sher ya Billi tool.
If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.