Aim to prolong SIPs' term till you're earning

Many people start a “SIP” programme.  They opt for periods which could be 12 or 24 or some fixed duration. Recently, I met someone who had completed a three-year investment in a few SIP programs. He wanted to know whether to redeem it and put it elsewhere. I guess, to many people, SIP is a fixed time plan.  It is ideally a plan that should continue so long as you earn and can save.

When your three- or two-year SIP gets over, ideally you should let the investment remain. And unless you have made a bad choice, continue the same one for ever. By bad choice, I mean something like a ‘sector’ fund.  

Ideally, if one can graduate to direct equities, it is useful to do SIP in them. When you do your SIP in a mutual fund, you have an annual loss of one to one a half percent which the mutual fund charges you. In a term of thirty or forty years, this can be a huge amount.  Of course, in direct equities, the risks are higher than in a diversified mutual fund.

SIP in well known, established companies that have been around for two decades or more and will likely to be around for a few more are the ones that you could consider. And if you see the Nifty or the Sensex components, you can easily spot the better names. Companies that have delivered profits and sales growth year on year. SIP in such stocks are a great instrument for creation of wealth. These could be companies whose products you are familiar with.

An SIP ensures that you actually save something every month (or whatever frequency you choose). Do not plan your expenses based on assumptions that a one year or two year SIP in equities will get you there. Markets being what they are, point to point returns are never clear.

Over a two or three decade time frame, we can expect 10 to 12 per cent compounded returns. When you invest ‘lump-sum’ your returns are a function of your entry price. If you are in direct equities and like to invest large chunks, some kind of timing helps. Timing in this context means that we pay a price that is close to fair as we estimate.

For example, if we see that the shares of Nestle have generally traded in a range that is between 20 and 50 times earnings, where should be one buying? I would buy it at PE closer to 20 rather than to 50. You have to set up your buying prices and wait. In a decade, you will most likely get one to two opportunities to buy at reasonable prices. When buying, two things that are related are the buying price and the prospective returns.

I am not an expert and cannot be buying and selling stocks round the year. That is a different occupation and calls for a different mindset. I have generally seen that people who are not professionally in to stocks for a living, can get hurt seriously if they think that their successful  one-off trade was due to their trading skills. You will end up with a vast number of shares that are under water and may never see your buying price again.

Assuming that you have reached the end of your savings period, one would normally stop the SIP.

Now, the important thing is take a call about whether that money will be needed to meet living costs. If it is going to be needed, it should be slotted for redemption.

However, timing of the sell is important. Look at historical market multiples, track their range etc. Leave yourself a three to five year window for pulling out money from equity mutual funds or from equities.  At a timing that is convenient to us (when the markets are in a great frame of mind, valuations are high) shift the money in to a Liquid Fund. Or Bank FDs.

When we invest, we do think that we should get a 10 to 12 percent return.

If we pull out when the markets are bad, our returns will be low. And on a SIP that has run for many years, the amounts are significant.

Important thing is to exit when the returns are decent. Waiting for higher returns can cost dearly.

Once you are in a liquid fund, you could use a SWP (Systemic Withdrawal Plan). Or simply draw what you need on a regular basis. When we are saving for tomorrow, we should also think about what we should be doing when that ‘tomorrow’ arrives.

(The writer is a veteran investment adviser. He can be contacted at balakrishnanr@gmail.com)