Is Perpetual SIPs In Mutual Funds A Good Idea?   Mar 05, 2018

Perpetual SIP

Over the recent few months, the personal finance section of newspapers and business magazines have often highlighted about mutual funds’ Systematic Investment Plan (SIP) accounts achieving new milestones.

As per the latest AMFI report, Mutual Fund SIP accounts stood at 19.7 million as in December 2017. As much as Rs 6,600 crore was collected through SIPs in the same month.

Clearly, over the past few years, investing in mutual funds through SIPs has become a fad. So much so, that SIPs have become synonymous with mutual funds.

Being in the mutual fund space for several years now, I have come across and have answered queries seeking the “best SIPs”. Though SIP refers to a Systematic Investment Plan, which is only a facility to invest in mutual funds on a regular basis. What people are actually seeking is the best mutual fund to start a SIP.

Earlier, nascent investors used to go scouting for the “best mutual funds” or “top mutual funds”. But now, amateur savers seek the “best SIPs” or “top SIPs”. Though unintentionally mistaken, people assume SIPs to be a standalone mutual fund product.

A simple search on Quora will lead you to multiple queries on “best SIPs”.

Take for example this query: “What is the best SIP (systematic investment plan) in India with great returns? How long should the investment be done for?” There are as many as 449 followers of this question, which indicates that over 400 people are eager to know which are the “best SIPs”, a high number by Quora standards. There are several other similar queries that are highly viewed and have over a 100 followers.

If you are seeking the potentially best mutual funds to SIP in 2018, I suggest you take a look at PersonalFN’s exclusive report—The Super Investment Portfolio – For SIP Investors. After a rigorous shortlisting process, PersonalFN goes a step ahead when selecting funds that are SIP-worthy. To know more about the report, read here.

Picking the right SIP tenure

Choosing the right mutual fund to SIP is just the first step to investing via the systematic route. You also need to decide the second step—the SIP tenure.

Most investors opt for SIP in equity funds as it helps to tide over market volatility. While this is true, it is essential to keep a long-term investment horizon. At times, I have witnessed distributors, just to get a client enrolled, suggesting a SIP tenure of 1 year.

However, such short-term investments in equity will not be beneficial to your financial health.

PersonalFN in the past has often emphasised the importance of setting specific financial goals. While the task may seem rudimentary, it serves multiple purposes

First, it gives your investments a direction. You know how much needs to be saved every month towards a specific goal.

Second, it adds an emotional value. Investments made in a haphazard manner, serve no objective, and so you do not have any emotional attachment to them. But when you set out with a purpose in mind, you ensure the desired goal is achieved.

So, before you start a SIP, make sure you check this off the list first.

The tenure of your SIP in equity funds should match the investment horizon of long-term goals that span over five years. This will not only ensure that you are able to average your cost across market cycles, but it will also give you the benefit of compounding.

Should you opt for a Perpetual SIP?

You can choose a SIP tenure from six months to perpetuity.

So when filling up the SIP Application Form, also known as the SIP Registration Cum Mandate Form, you need to mention the start month & year and end month & year. If you leave the end date blank in a SIP mandate, the fund house will set a default tenure, which can range from five years to December 2099, depending on the fund house.

In other words, there is no maximum limit to your SIP tenure and your instalments can run until perpetuity.

You can stop the SIP at any time by providing a written application to the fund house. So, once you achieve your goals, you can redeem your funds as per your convenience.

Given this flexibility to investors, do Perpetual SIPs make sense?

No. There is a strong reason for this. Read on…

For short-term financial goals, such as buying a car or planning a vacation, where the investment horizon may range under five years, you may set an end date.

For long-term goals such as retirement, you can run your SIP with the end date at retirement. So that can be, 10 years, 20 years or even 30 years from now, depending on your current age.

Hence, rather than leaving the End Month/Year blank or even choosing an ad hoc date, it would be wise to set a date you have set for your investment goals. By doing this, you will ensure that your investment plan is in line with your financial goals.

If the fund performance does not live up to your expectations, or if there are changes to the fundamental attributes of the scheme, you can always stop the SIP, and restart the investments in another promising mutual fund scheme.

Take control of your finances

Do not let the fund house set the default SIP tenure. As you are planning for your investment goals, it is imperative that you take full control of your finances.

In the past, you may have heard of investors losing money or earning low returns on their investments. In most cases, this is because of unplanned investments or blindly investing without any end goal.

A financial plan ensures that you are well equipped to deal with dynamically changing circumstances at a personal level as well as a macro level. In the absence of a financial plan, you might not be empowered to accomplish what you have dreamt of achieving and might also be under-prepared to deal with contingencies.

Constructing a financial plan will enable you or your financial planner to review your portfolio (both equity and debt) and strike the right asset allocation to provide you with the best possible outcomes.

P.S. Let me tell you, achieving financial nirvana isn't as difficult as it is often made out to be. To get there, all one needs to do is, construct a viable financial plan and be determined about achieving it. Hence, it would be prudent to invest in the advice of an experienced financial planner who might help you plan and manage your finances better. Answer this questionnaire to get an idea of where you stand with your own financial health and pinpoint areas where you may need more work.

Editor’s Note:

Everyone needs a financial plan, whether you earn Rs 20,000 per month or Rs 2 lakh per month. You too, can create a financial plan like an expert by signing up for PersonalFN’s comprehensive A to Z e-course. This video e-Course will be your guide to most serious decisions regarding money matters.

Out of the eight modules, in Module #1 we start with the basics of budgeting and managing cash flows. In Module #2 of our video tutorials, we speak about how to set S.M.A.R.T. goals. While in Module #4, we learn about how to select winning mutual funds, along with the right asset allocation and its importance. The module will also outline strategies to build your optimum investment portfolio and much more. You will learn the Ins and Outs of mutual funds and other personal finance topics. Read more about this e-course here

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Author: Jason Monteiro

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