Systematic Investment Plan or SIP, which encourages an investor to set aside a monthly fixed value of as little as Rs 500 and invest in equity mutual funds on a regular basis, basically ensures regularity of investments without trying to time the markets.
It also allows for averaging out the cost of purchase for an investor when he/she invests continuously across various market cycles of highs and lows. Throughout various phases of the market cycle, retail investors have seen the superiority of investing via the SIP route over the years.
As it happens with all things in life, after tasting success with the 'fixed' value SIP, investors started yearning for more. This led to the creation of Smart SIPs also called by other names such as - Opti/Variable/Step-up SIP.
So, what is 'Smart SIP'?
Smart SIP’ is increasing the instalment value as the market goes down. This enables an investor to invest more when the markets are on their way down thereby lowering the average cost of the purchase in a more dynamic and active manner.
"Various mutual funds offer a wide variety of the 'smart' logic used which allows this facility to an investor and the investor defines a minimum and maximum amount of instalment that he can afford to invest.
'Smart SIP’ books profits as a part of the existing equity units when markets are very expensive. The sale proceeds and monthly instalments are invested in liquid schemes.
Here are the key things to keep in mind while investing in 'Smart SIP':
1.Just like in fixed value SIP, continuity of these investments is important to ensure that the investor invests across various market cycles to gain the most optimum advantage of this cost-averaging tool
2.It is most important that an investor decides the maximum amount that he/she can afford to invest over a medium-term and defines the limit accordingly to gain the maximum advantage of a Smart SIP.
3.It is also important to understand the logic used behind the 'Smart SIP' and choose wisely amongst the various such options available with various mutual funds.
It also allows for averaging out the cost of purchase for an investor when he/she invests continuously across various market cycles of highs and lows. Throughout various phases of the market cycle, retail investors have seen the superiority of investing via the SIP route over the years.
As it happens with all things in life, after tasting success with the 'fixed' value SIP, investors started yearning for more. This led to the creation of Smart SIPs also called by other names such as - Opti/Variable/Step-up SIP.
So, what is 'Smart SIP'?
Smart SIP’ is increasing the instalment value as the market goes down. This enables an investor to invest more when the markets are on their way down thereby lowering the average cost of the purchase in a more dynamic and active manner.
"Various mutual funds offer a wide variety of the 'smart' logic used which allows this facility to an investor and the investor defines a minimum and maximum amount of instalment that he can afford to invest.
'Smart SIP’ books profits as a part of the existing equity units when markets are very expensive. The sale proceeds and monthly instalments are invested in liquid schemes.
Here are the key things to keep in mind while investing in 'Smart SIP':
1.Just like in fixed value SIP, continuity of these investments is important to ensure that the investor invests across various market cycles to gain the most optimum advantage of this cost-averaging tool
2.It is most important that an investor decides the maximum amount that he/she can afford to invest over a medium-term and defines the limit accordingly to gain the maximum advantage of a Smart SIP.
3.It is also important to understand the logic used behind the 'Smart SIP' and choose wisely amongst the various such options available with various mutual funds.
We’re reaching the end of a rather unexpected year, and it’s time to ask yourself how you have fared financially to meet your annual targets this year. Many have experienced income loss, salary reduction, or job loss this year due to the Covid-19 pandemic, and you should assess its impact on your critical financial targets and take effective steps to bounce back if required. We have listed a few crucial financial targets which you must pay attention to now.
Is your emergency fund adequate?
If you were forced to dig into your emergency fund in the last few months, and now if your finances have started stabilising, you must replenish the fund at the earliest as you can never be sure that there won’t be any more uncertainties in the near future. And if you still don’t have an emergency fund, there’s no time to lose to build one worth at least six months of your expenses.
How’s your insurance cover?
Health and life risks have increased manifold due to the pandemic, and considering the skyrocketing hospitalisation costs, you must re-evaluate your existing health insurance cover. Have a medical plan worth at least `5-7 lakh if you stay in a metro city. You should also consider further increasing your protection level by going for an affordable top-up or super top-up plan based on your requirements.
Now, if you have taken a new loan, availed loan moratorium, or have opted for loan restructuring, your financial obligations too may have changed. Your future expense expectation could have also changed in sync with the changing financial environment; therefore, take a look at your existing life insurance cover and increase it adequately.
Have you fulfilled debt obligations?
If cash-flow issues forced you to opt for the six months’ moratorium or loan restructuring plans, you must realise that these could increase your overall loan burden. As such, you must get absolute clarity about the extra financial load of availing these options and build a plan to repay the dues in full on time to avoid further complications. In case of home loans, you should ideally aim to raise the required funds to make adequate pre payments so that you’re able to become debt-free according to your initial plan.
Have you met your tax-saving goals?
The pandemic started before the start of the financial year 2020-21; therefore, many investors have not yet taken their tax-saving initiatives. Despite the unexpected situation, stay ready with your tax-saving plan and accomplish it at regular intervals.
For example, you may invest in tax-saving schemes every month or every quarter. Delaying tax-saving initiatives can push you into a last-minute rush where you could make costly mistakes. You may also adjust your tax-saving investment size as per your income till now and the income that you expect to earn in the remaining months before the end of the current financial year.
Are your investments on track?
Disciplined and consistent investments are keys to timely achieving your financial goals. There is no doubt that the pandemic has made it difficult for many people to focus on their investment goals, but completely shutting down your investments could be risky too. Further delay in restarting your investments could deter you from achieving your financial goals. If you have skipped too many investments, it’s time to assess the situation and make a plan to recoup quickly.
Is your emergency fund adequate?
If you were forced to dig into your emergency fund in the last few months, and now if your finances have started stabilising, you must replenish the fund at the earliest as you can never be sure that there won’t be any more uncertainties in the near future. And if you still don’t have an emergency fund, there’s no time to lose to build one worth at least six months of your expenses.
How’s your insurance cover?
Health and life risks have increased manifold due to the pandemic, and considering the skyrocketing hospitalisation costs, you must re-evaluate your existing health insurance cover. Have a medical plan worth at least `5-7 lakh if you stay in a metro city. You should also consider further increasing your protection level by going for an affordable top-up or super top-up plan based on your requirements.
Now, if you have taken a new loan, availed loan moratorium, or have opted for loan restructuring, your financial obligations too may have changed. Your future expense expectation could have also changed in sync with the changing financial environment; therefore, take a look at your existing life insurance cover and increase it adequately.
Have you fulfilled debt obligations?
If cash-flow issues forced you to opt for the six months’ moratorium or loan restructuring plans, you must realise that these could increase your overall loan burden. As such, you must get absolute clarity about the extra financial load of availing these options and build a plan to repay the dues in full on time to avoid further complications. In case of home loans, you should ideally aim to raise the required funds to make adequate pre payments so that you’re able to become debt-free according to your initial plan.
Have you met your tax-saving goals?
The pandemic started before the start of the financial year 2020-21; therefore, many investors have not yet taken their tax-saving initiatives. Despite the unexpected situation, stay ready with your tax-saving plan and accomplish it at regular intervals.
For example, you may invest in tax-saving schemes every month or every quarter. Delaying tax-saving initiatives can push you into a last-minute rush where you could make costly mistakes. You may also adjust your tax-saving investment size as per your income till now and the income that you expect to earn in the remaining months before the end of the current financial year.
Are your investments on track?
Disciplined and consistent investments are keys to timely achieving your financial goals. There is no doubt that the pandemic has made it difficult for many people to focus on their investment goals, but completely shutting down your investments could be risky too. Further delay in restarting your investments could deter you from achieving your financial goals. If you have skipped too many investments, it’s time to assess the situation and make a plan to recoup quickly.
Mutual funds are the most preferred vehicle of investment for investors who wish to have better returns by assuming little additional risk. Investors who have limited knowledge and time to invest in the stock market directly by themselves take the mutual fund route of investment, generally through systematic investment plans (SIPs). Let us discuss below certain key indicators that the investors must check before investing in mutual funds to get the most of their investment.
Check the type of mutual fund
Mutual funds offer a plethora of funds ranging from pure equity funds to pure debt funds and everything in between. On the equity side, the funds range from capitalisation-based funds to index funds to thematic funds. On the debt side, funds on offer are liquid funds and fixed income funds to funds that invest only in government securities. It is always recommended to diversify one’s investment by investing in different types of funds to spread the risk.
Check the risk rating
Recently, market regulator Securities and Exchange Board of India (Sebi) released a methodology to quantify the level of risk in a mutual fund scheme. Accordingly, every mutual fund is rated on a risk-o-meter that gives the risk rating of the fund on a five-point scale ranging from one to five. One means low risk whereas five means very high.Though it is mandatory from next calendar year, many fund houses are already adopting it. Based on your risk appetite, you should choose your mutual fund.
Check the performance indicators:
Before choosing the mutual funds, investors should look at the following major performance indicators.
Alpha: It indicates how well the fund manager has performed over and above the benchmark index. The Alpha shows the percentage above or below the benchmark index that the fund has been able to return to the investors. Investors should always look for funds with higher positive alpha.
Beta: It indicates the volatility of funds to the benchmark index. A beta of more than one indicates that the funds were more volatile than their benchmark index, and vice-versa. An investor should know the beta of the fund to understand if the superior returns were achieved with or without taking additional risks. A risk-averse investor would prefer to have funds with lower beta.
Sharpe and Treynor ratios
Sharpe ratio shows the amount of return in excess to the risk-free rate per unit of volatility. Investors should always prefer funds with higher Sharpe ratio. Treynor ratio indicates the amount of excess returns achieved per unit of risk undertaken. But here risk is measured as beta of the portfolio. Similar to Sharpe ratio, investors should choose funds with a higher Treynor ratio.
Thus, by doing a quick analysis on the above parameters, investors stand to make a better investment call at their end. Often the above indicators are readily available, and these will immensely help investors in their long journey of investment.
Reading the signs
- Invest in different types of funds to spread the risk
- Risk-o-meter gives the risk rating of the fund on a five-point scale ranging from one to five
- Alpha indicates how well fund manager has performed over and above benchmark index
- Beta indicates volatility of funds to the benchmark index
- Sharpe ratio shows amount of return in excess to risk-free rate per unit of volatility
- Treynor ratio indicates amount of excess returns achieved per unit of risk undertaken
Check the type of mutual fund
Mutual funds offer a plethora of funds ranging from pure equity funds to pure debt funds and everything in between. On the equity side, the funds range from capitalisation-based funds to index funds to thematic funds. On the debt side, funds on offer are liquid funds and fixed income funds to funds that invest only in government securities. It is always recommended to diversify one’s investment by investing in different types of funds to spread the risk.
Check the risk rating
Recently, market regulator Securities and Exchange Board of India (Sebi) released a methodology to quantify the level of risk in a mutual fund scheme. Accordingly, every mutual fund is rated on a risk-o-meter that gives the risk rating of the fund on a five-point scale ranging from one to five. One means low risk whereas five means very high.Though it is mandatory from next calendar year, many fund houses are already adopting it. Based on your risk appetite, you should choose your mutual fund.
Check the performance indicators:
Before choosing the mutual funds, investors should look at the following major performance indicators.
Alpha: It indicates how well the fund manager has performed over and above the benchmark index. The Alpha shows the percentage above or below the benchmark index that the fund has been able to return to the investors. Investors should always look for funds with higher positive alpha.
Beta: It indicates the volatility of funds to the benchmark index. A beta of more than one indicates that the funds were more volatile than their benchmark index, and vice-versa. An investor should know the beta of the fund to understand if the superior returns were achieved with or without taking additional risks. A risk-averse investor would prefer to have funds with lower beta.
Sharpe and Treynor ratios
Sharpe ratio shows the amount of return in excess to the risk-free rate per unit of volatility. Investors should always prefer funds with higher Sharpe ratio. Treynor ratio indicates the amount of excess returns achieved per unit of risk undertaken. But here risk is measured as beta of the portfolio. Similar to Sharpe ratio, investors should choose funds with a higher Treynor ratio.
Thus, by doing a quick analysis on the above parameters, investors stand to make a better investment call at their end. Often the above indicators are readily available, and these will immensely help investors in their long journey of investment.
Reading the signs
- Invest in different types of funds to spread the risk
- Risk-o-meter gives the risk rating of the fund on a five-point scale ranging from one to five
- Alpha indicates how well fund manager has performed over and above benchmark index
- Beta indicates volatility of funds to the benchmark index
- Sharpe ratio shows amount of return in excess to risk-free rate per unit of volatility
- Treynor ratio indicates amount of excess returns achieved per unit of risk undertaken
Here is a quick look at some lessons that we can learn from this year to make our investments work better for the next year.
Contrarian approach:
A contrarian is someone who buys or sells securities against the market sentiment. Hence, if the market sentiment is pessimistic and people are selling stocks, then a contrarian approach requires the investor to buy them. On the other hand, if markets are rallying and people are buying securities, a contrarian investor sells and books profits.
Number of stocks in the portfolio
In this year many investors were optimistic about the economy and markets were doing well. Hence, many investors started looking at different sectors and companies with varying market capitalisation to find the coveted multi-baggers.
However, as the pandemic sent markets south, these investors found it difficult to monitor and track the stocks in their portfolios. This was a huge disadvantage at a time when volatility was at its peak.
While the economy has started recovering from the initial COVID-19 shock, investors will do well by remaining aware of the latest developments around the world.
Unless the crisis tides over, investors might want to reconsider the number of stocks they hold in their portfolios.
Apart from the number of stocks, they might also want to analyse the quality of stocks and if they can withstand market volatility this year.
SIPs and SWPs
Many investors opt for a systematic investment plan (SIPs) to gain exposure to stocks over time while benefiting from Rupee Cost Averaging. If the markets are bearish, this helps them reduce the average cost of buying and a better opportunity to earn profits when markets bounce back.
Similarly, in bullish markets, many investors avoid selling their stocks at one time as prices are expected to increase. Hence, they opt for a systematic withdrawal plan (SWPs) and maximise their returns while booking profits. On the other hand, if the markets are bearish, then an SWP can be counterproductive.
With markets responding sharply to any news regarding the pandemic, volatility is likely to remain high. Hence, investors must reconsider the SIP/SWP modes of investing/redeeming investments based on market conditions.
Booking losses
The pandemic and lockdowns led to volatility in stock markets. While some investors sold their stocks and booked losses, others held on to their investments as they expected the market to recover soon.
However, the lockdown extended to more than six months and investors who had reassessed their investment portfolios and held on to quality stocks while selling the rest were in a better position than the others.
The strategy they followed was not making an investment decision in a state of panic. They also realised that with the changing market conditions, the portfolio needed to be shuffled.
This is the level of awareness that can help investors manage volatility in the market and position themselves to make the best of the opportunities available to them.
Diversify
While diversification was never meant to be an option, many investors considered it to be a luxury than a necessity, hence they wouldn’t strive to maintain a diversified portfolio at all times.
When markets turned volatile in March, some sectors recovered much faster than the others (eg the pharma sector).
Hence investors who had diversified across sectors and across asset classes managed to reduce their losses to a great extent.
Contrarian approach:
A contrarian is someone who buys or sells securities against the market sentiment. Hence, if the market sentiment is pessimistic and people are selling stocks, then a contrarian approach requires the investor to buy them. On the other hand, if markets are rallying and people are buying securities, a contrarian investor sells and books profits.
Number of stocks in the portfolio
In this year many investors were optimistic about the economy and markets were doing well. Hence, many investors started looking at different sectors and companies with varying market capitalisation to find the coveted multi-baggers.
However, as the pandemic sent markets south, these investors found it difficult to monitor and track the stocks in their portfolios. This was a huge disadvantage at a time when volatility was at its peak.
While the economy has started recovering from the initial COVID-19 shock, investors will do well by remaining aware of the latest developments around the world.
Unless the crisis tides over, investors might want to reconsider the number of stocks they hold in their portfolios.
Apart from the number of stocks, they might also want to analyse the quality of stocks and if they can withstand market volatility this year.
SIPs and SWPs
Many investors opt for a systematic investment plan (SIPs) to gain exposure to stocks over time while benefiting from Rupee Cost Averaging. If the markets are bearish, this helps them reduce the average cost of buying and a better opportunity to earn profits when markets bounce back.
Similarly, in bullish markets, many investors avoid selling their stocks at one time as prices are expected to increase. Hence, they opt for a systematic withdrawal plan (SWPs) and maximise their returns while booking profits. On the other hand, if the markets are bearish, then an SWP can be counterproductive.
With markets responding sharply to any news regarding the pandemic, volatility is likely to remain high. Hence, investors must reconsider the SIP/SWP modes of investing/redeeming investments based on market conditions.
Booking losses
The pandemic and lockdowns led to volatility in stock markets. While some investors sold their stocks and booked losses, others held on to their investments as they expected the market to recover soon.
However, the lockdown extended to more than six months and investors who had reassessed their investment portfolios and held on to quality stocks while selling the rest were in a better position than the others.
The strategy they followed was not making an investment decision in a state of panic. They also realised that with the changing market conditions, the portfolio needed to be shuffled.
This is the level of awareness that can help investors manage volatility in the market and position themselves to make the best of the opportunities available to them.
Diversify
While diversification was never meant to be an option, many investors considered it to be a luxury than a necessity, hence they wouldn’t strive to maintain a diversified portfolio at all times.
When markets turned volatile in March, some sectors recovered much faster than the others (eg the pharma sector).
Hence investors who had diversified across sectors and across asset classes managed to reduce their losses to a great extent.