Are flat markets and poor fund choices eating into your returns? Here are actionable tips on making the most of your SIP and lumpsum investments.
While Systematic Investment Plans (SIPs) are hailed as the ultimate wealth-building tool, many investors lose their way before reaching their financial finish line. In this edition of Top of Mind, we take up key questions on SIPs to make your investment experience a lot more smoother :
Do SIPs Work In All Fund Categories And At All Times?
Usually, the belief is that SIPs will work by averaging costs for equity funds, since markets tend to be volatile on a day-to-day basis.
But investors who entered seeing the rally since Covid and have experienced flat or falling market conditions in the last two years, have questioned the efficacy of SIPs even in the equity category. Essentially, there is nothing wrong with the concept of SIPs. In a falling market for instance, if your investments contain losses lower than the Nifty or the Nifty 500, your SIPs are still working. Choosing appropriate funds based on market valuations, opportunities, etc. can enhance your investment experience and give you better returns than the market does, even when you see the markets falling, flat or giving very nominal returns.
Contrary to popular belief, SIPs can be done in debt funds also. For example, if one has just started earning and wants to create an emergency fund equivalent to six months’ salary, starting a SIP in an appropriate debt fund is a good idea. Using the SIP route to build emergency funds also gives room to begin savings in equites through SIPs simultaneously. Similarly, emergency funds, once used, can also be replenished using the same method.
One can do SIPs in longer duration debt funds as well, to ride the interest rate cycles. As bond yields rise and interest rates move up, NAVs of debt funds fall. One can average lower as yields / interest rates peak (when NAV falls the most) and gain when the cycle reverses.
Thirdly, a theme which has a long runway, when identified in early stages, can also be suitable for SIP investments as the idea is established. You can add lumpsums when it gains momentum and exit at the peak.
Should you also be investing lumpsums even if you are doing SIPs? What are the ways in which you can do lumpsum investments and where should you be investing it?
First of all, if you are maximizing your monthly savings into SIPs and don’t have enough for meaningful lumpsum investments in the market from time to time, it doesn’t matter. You can focus on doing your SIPs right, so that your fund choices provide diversity, stability, as well as visibility towards reaching your goal.
As your investible surplus increases, you can allocate more for lumpsums. Primarily, lumpsum investments along with SIPs can help you reach your goals faster. Besides, opportunistic lumpsum investing compounds quicker when the right opportunity is spotted and the entry and exit is timed well.
There are four scenarios in which lumpsum investing can be done:
One, when market fall provides opportunities. Think of March 2026, when the US – Iran war broke out. Per se, the markets dropped 10 % that month and was 15% down from the January 2026 peak, providing the perfect opportunity to make additional long-term investments at a lower cost. Sometimes, the opportunity can be short-lived; sometimes, corrections can last longer. The best way to deal with this uncertainty is to divide the amount you can invest, into few tranches. If the market rebounds quicker, you would have at least invested once and not missed the bus entirely. If the correction is prolonged, it gives you enough time to average downwards by investing across a few tranches. If the market fall provides opportunities in the same segment that you have your SIPs going in, you could add lumpsums in the same fund/funds. Else, invest based on where the opportunity opens.
Two, when you are investing for near-term needs. When investing for needs within a timeframe of 3 years or so, you could make lumpsum investments in accrual funds, equity savings or arbitrage funds. The idea is to get returns higher than FDs without taking on too much risk.
Three, when you have lumpsums from investments that have matured. Usually, maturity amounts of our earlier investments in FD/RDs, Bonds, NCDs, Target Maturity Funds, etc. get credited automatically into our savings accounts. They are mostly used up for our daily spends, if we haven’t tagged them with any big-ticket expense or goal. You could instead redirect this amount to equity mutual funds through a lumpsum investment. Another option is to invest the lumpsum amount in a liquid fund first and do a systematic transfer (STP) every month into equity funds. Again, whether you invest in one go or use the STP route, where you should invest, etc. should be based on merit. Take the help of your advisor to choose the best option.
Four, when you do thematic investing. Usually, entry and exit in themes can be timed through lumpsums to maximize the benefits. Your advisor can guide you on the appropriate choices and the sums to invest.
Is There An Ideal Number Of Sips For A Portfolio?
SIPs have democratized investing by allowing ticket sizes of even below Rs 1000 per investment. But the unintended implication is that investors tend to keep adding every fund they see or hear is doing well, to their portfolio. However, the truth is that you will mostly not reap any notable benefits from FOMO investing. You will just end up with a long tail of funds in your portfolio. While screen-based investing has made it easier for adding any number of funds and viewing your portfolio value on a daily basis, in reality, for a fund to have any meaningful impact on returns, it should make up for at least 5-10 % of your portfolio value. About 5 funds with weights of 10-25 % in each are ideal for any investment ticket size. You may have 1-2 funds where you have invested lumpsums in, apart from this. Overall, if you have over 25-30 % weightage to any fund, then it is time to rebalance.
How Should One Review Their SIP Portfolio? What Is The Criteria To Add/Let Go Of A Fund?
‘Is my money going into the right fund?’ is a question to ask yourself when you begin/ add/change SIP investments. More often than not, investors end up choosing funds with good track record of past returns and enter when the category’s/theme’s performance has peaked. This leads to a sub-par experience after their entry, creating a divergence between the return of the fund vs the personal return of the investor. Impatient investors make a hasty exit in the process, having lost capital.
Long-term investors stay put defending their choices, saying they can sit through downturns. But the reality is that, in the journey from a peak to a trough and back to same peak, you lose valuable compounding time. You will predominantly, only benefit from the journey towards the next new peak.
Ideally, when valuations of a particular category look rich, it is the right time to stop SIPs, book long-term profits and move the SIPs to safer categories. You can always come back when valuations return to the comfort zone. Most money is made when you start investing at a point where you have nothing much to lose from.
Thus, finding the best avenue for your money to work at all times, results in superior compounding over your investment period.
I Have Other Pressing Needs For Money And Redirect My SIP Amounts There. I Find It Difficult To Balance My Spending And Investing Patterns.
In our experience, we have seen that investors skip SIP instalments for three key reasons:
One, personal / EMI commitments resulting in cash crunch. In a good chunk of these cases, bank accounts go near-empty not long after the salary comes in, resulting in defaults on the date when the SIP instalment is to be auto-debited. Three consecutive defaults result in the SIP being stopped automatically.
Track your expenses for the last three months and see where the excesses are happening. It could be frequent travel, eating out, ordering in or lifestyle expansion. Cut them out one by one. Start at least one SIP with what you save on expenses. Add more SIPs as your spending becomes more disciplined. Once you’ve got your spending under control, set aside at least 20% of your income for SIP debits on the very next day your salary comes in. Manage your expenses and EMI commitments within the remaining 80%.
Two, emergencies. Urgent medical needs, sudden job loss or salary cuts, being between jobs or on a sabbatical is another popular reason for SIP stoppages. Usually, it is advised to create an emergency corpus to tide over these difficulties. But even if you have one, it is most often created to cover expenses and not investment commitments. Hence investment commitments automatically join the spending pool when the situation is stressed. To avoid a repeat, add six months’ SIP obligations to six months’ expenses when rebuilding the emergency corpus.
Three, for meeting needs other than original savings goals. Many investors change tracks and book out of SIPs prior to reaching their original intended goals. For example, you may be saving for your house down payment 7 years later but suddenly decide to buy a fancy car or go on a Europe tour 3 years down the line, using those savings.
The more disciplined way is to create a separate investment for each need. Spend only if you have already saved it. Else, postpone the spending. Instant gratification by redirecting savings may be exciting in the short-term but is harmful in the long run. You will run short of corpus when key life goals come up.
Finally, if you stop or pause SIPs temporarily for other reasons, it is important that you go back on track two or three months later and continue it in the right funds, whatever be the market situation.
Do you wish to start, restart or renew your SIPs or make lumpsum investments with Milestones2Wealth? Reach out to us today!
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