Random Decisions Can Derail Systematic Investing

Systematic investing, through SIP, brings a discipline into your investment process. Since you commit to invest a fixed sum on a fixed date in a pre-decided fund, you become an unemotional investor. In other words, when you invest in equity funds through SIP, you save a part of your income every month, avoid timing the market and benefit from averaging. And if you stay committed to your time horizon as well, you can tap the true potential of equity and benefit from the power of compounding.

While there are merits of following this potentially rewarding approach, it is equally important to follow the right investment process. Remember, a random approach can either expose you to unwarranted risks or disappoint you in terms of returns. Simply put, you won’t achieve your investment goals by investing a random amount that is either not enough to achieve your goals or exceeds your capacity to invest, thereby compelling you to disrupt your investment process. Another important aspect in this process is asset allocation.

Ignoring asset allocation can either make your portfolio very aggressive or very conservative. Investing in too many funds, continuing with the same amount of investment despite rise in your income over the years and not tracking the performance of funds thinking that over time all funds do very well are some of the other pitfalls that can impact the final result. Here’s how to figure out whether you are on the right track or not.

1) Review your Investment Amount and Portfolio - You need to review your investment amount and portfolio to avoid any disappointment in the future. To do so, ensure that your goals to be achieved over varied time horizons are well-defined, a target is set for each one of them and calculate how much you need to invest to achieve those targets. When you follow a similar approach for all your goals, it helps you ascertain your asset allocation and how much money has to be invested per month to achieve these goals. It is possible that you may not have the required surplus to begin investing for all your goals.

If you have too many funds in your portfolio, you must realise that mutual funds themselves are a diversified investment vehicle and hence having too many similar funds doesn’t help in any which way

In that case, budgeting can help you identify areas where you are spending more than you realise as well as prioritise your goals. The key, however, is to begin investing and top up your investment amount every year rather than delaying the investment process itself. The fund selection should be done subsequent to working out asset allocation. For equity funds, you must begin with funds in categories such as multi-cap, Large-Cap, midcap and flexi-cap funds. For Hybrid Funds, depending upon your time horizon, you can choose a mix of equity savings, balanced advantage and aggressive hybrid funds. For short-term goals, Debt Funds should be chosen by matching your time horizon with the maturity duration of fund holdings. 

2) Limit Number of Funds in your Portfolio - Many investors err by having too many funds in the portfolio. As a result, they not only find it difficult to track the performance but also non-performing funds pull down the overall portfolio returns. If you have too many funds in your portfolio, you must realise that mutual funds themselves are a diversified investment vehicle and hence having too many similar funds doesn’t help in any which way. You must weed out nonperforming funds by measuring their performances vis-à-vis their benchmark and average return of the peer group. 

3) Increase Investment Amount over Time - You must increase investment amount as your income rises. Even if you have been investing adequate amount to achieve your goals, increasing the investment amount creates a cushion for the future. Mutual funds have made it quite easy to increase the investment amount through SIP top-up facility wherein you can opt for an upper limit and increase the amount of the SIP periodically