Avoid severe portfolio moves as markets scale new highs, suggest experts

Going 100% into equity SIPs, or getting wholly into debt, will hurt in the long run, say experts

July saw two record high numbers for systematic investment plans (SIPs). On the one hand, the highest-ever number of new SIP accounts — 2.38 million — were started. At the same time, the number of discontinued SIPs also touched a high of 855,000 for the financial year.

Experts attribute two reasons for so many SIPs being discontinued.

Says Jharna Agarwal, head, Anand Rathi Preferred: “Experienced investors are synchronising their asset allocation with market conditions. Inexperienced investors, on the other hand, are worried that the market is at very high levels and are cutting short their SIP tenures.”

Note that the discontinued SIP number includes those whose tenures were completed.

Don’t stop equity SIPs

Experts advise against such behaviour.

Says Rishad Manekia, founder and managing director, Kairos Capital: “Link your decision to start or stop SIPs to the achievement of your financial goals.”

Linking it to market levels is like trying to time the market - something that is impossible to pull off consistently. 

Some investors have been shifting their SIPs to debt funds, even for long-term goals.

Says Manish P Hingar, founder, Fintoo, an investment and tax advisory firm: “Younger investors should not worry about the risk arising from high market levels. They have time on their side. They should continue their equity fund SIPs to benefit from the power of compounding in the long run.”

Many new investors are erring in the opposite direction. They are becoming overconfident and allocating 100 per cent of their SIPs to equity funds. “They are disregarding the principle of asset allocation,” says Gaurav Rastogi, chief executive officer, Kuvera.

Due to the sharp run-up in equities, many investors’ portfolios may have become overweight on equities. They should bring them back to their original asset allocation — by booking profits in equities and investing more in underperforming asset classes.

However, completely stopping equity SIPs or going entirely into debt SIPs will hurt them in the long run.

Lower NAV is not cheaper

A number of new fund offers have been launched this year. Many investors have started SIPs in them under the notion that their lower net asset value (NAVs) of ~10 means they are cheaper.

A fund's NAV depends upon the market price of its underlying assets. Newer funds have lower NAVs than older ones because they have been around for only a short while.

According to M Barve, founder, MB Wealth Financial Solutions, “Avoid factoring in a fund's NAV while deciding whether to start an SIP in it. Instead, assess its long-term performance by comparing against benchmark and peer returns.”

Be patient with your funds

Some investors have been stopping their SIPs in funds that have underperformed recently and have shifted to those whose recent performance has been better. Avoid doing so. If you keep switching, you will end up shifting from a fund whose good performance may be around the corner to another whose hot spell is behind it.

Some investors have been starting too many SIPs, believing their portfolios will become better diversified. But there is no additional benefit after a point.

“It only makes the portfolio harder to manage,” says Rastogi.

Five or six SIPs should suffice for most investors.

Finally, many investors don’t understand the lock-in period for their SIPs in equity-linked savings schemes (ELSS).

Says Manekia: “Every SIP is a fresh investment. If you start an SIP in an ELSS for three years, you will be able to redeem your last lot of units after six years.”

For calculating capital gains, the holding period is calculated from the date of investment and not from the date of start of SIP.