Passive investing is good – But SIP allocation is important to succeed

Most of the investors, if not all say that once you start a SIP, you just have to continue it without stopping it and you will have gained a substantial amount after some years. That makes a lot of sense, right?! It actually does work out that way mostly.

The intention in doing is to stop reacting to the market noises and to average out your purchase costs. However, while this may is a good practice, it is not entirely the only practice to succeed. You can’t just forget where you invest and keep on creating SIPs. It is more important to make a proper SIP allocation keeping in mind the market situations and the investor profile. Also, it is equally important to know whether you are trusting the wrong place.

Some investors think that as long as they contribute to the SIP, it will definitely fetch them a hefty return after a decade or so. If only it were true!! There are chances that, even if you do so, your returns might not be what you expect. To make things worse, you also miss out on superior returns.

Legacy data on the NSE Nifty
5-Year movement of Nifty

You can see that in a span of over 5 years, Nifty has more than a dozen ups and downs. By the time you want to redeem your SIP, the markets may be at a lower region. Of course, there is also the possibility of the market to be at an all time high when you exit. You may wonder even though there are ups and downs, the market overall has been on the rise over the 5 years. Why do I have to break my head with SIP allocation and stuff?!

Let’s Illustrate

Scenario 1

Let’s say that you invest ₹1,00,000 in the index fund. And you’re staying invested for 10 years without changing your allocation. Let’s compare the returns from your investment. While doing so, let us also compare the returns of fixed income securities and other equity funds with different risk levels.

Investment returns in various avenues on the basis of SIP allocation
10 year investment value

You can see the returns foregone just because you stayed invested only in the index fund without any fund allocation. Had you only allocated your investment in mid-cap or large-cap funds, you could have gained a handful. And of course, if you had some exposure in small-cap, you might have incurred a loss. So, you can see the effect a proper allocation of investments can do to your portfolio.

Scenario 2

Let’s assume you chose the best performing category of mid-cap fund. Even in that case, it is not certain that you would have made the best return. Why, you ask?! If we go one level deeper, in the mid-cap segment, there are various funds with different performance levels.

If you had chosen Mid-cap Fund A which is the best performing fund in the category, your rate of return would have been almost 13%. However, had you chosen the other fund, the least performing fund, you could have earned only 8%. The difference of this 5% would impact your portfolio in the long run.

Then there is also a small possibility where a fund performs excellently for the first 5 years and subsequently fail to provide returns. Therefore, the process of SIP allocation or more precisely, asset diversification becomes more important to the investors.

To conclude:

  • Choose the correct type of asset (even within equity) to systemically invest (SIP) in
  • Review your investment periodically to see whether your investment category is in line with general market trend
  • Compare the exact fund you are invested in with its peers and check whether their returns are in line with its competition

While you deserve a huge pat in the back to adhere to “invest and wait” school of thought, it is still in the best of your interest to do a timely assessment of your investments and allocate / reallocate appropriately. Never forget, its your money and so it’s your responsibility to ensure its with best hands.

Disclaimer: The above rate of returns on mutual funds were taken from Valueresearch MF screener (You guys should give it a look, it’s fantastic)

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