Investing in equity mutual funds via SIP for a five-year goal? Be prepared for a shock

So, how should investors go about their SIP investments?

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Equities are extremely risky in the short term. Always invest with a horizon of at least five to seven years.

You might have heard similar advice from mutual fund managers and advisors countless times. Did you invest in equity mutual funds through a systematic investment plan or SIP for a five- or seven-year financial goal? You might be in for a shock, warn mutual fund advisors. Why? You are investing via SIP for a long-term goal of seven years, right? Isn't that long enough? Is that what these advisors are talking about?

Well, the advice is about investing in equity schemes for five to seven years, but that does not happen when you invest via an SIP.


“The last instalment of your SIP investment is just one month old in the market. Only your first instalment has completed, say, five or seven years. Taking out money in such a short time is not wise at all,” says Subir Jha, Founder, Buckspeak, a Hyderabad-based wealth management firm.

He says a five-to-seven-year investment horizon might sound like a good decision, but for SIP investors it is too short as most of your SIP instalments would not complete even three years.

Hope you got the drfit? For example, suppose you invest Rs 1,000 in a mutual fund scheme and take the money out after five or seven years. In this case, you can say you have invested the money for five or seven years. However, when you are investing through a monthly SIP of Rs 1,000 for five or seven years, things are a little different. On the fifth year, only the first SIP would complete five years. Half of your SIPs would not have even complete three years.
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This fundamentally alters the investment plan of many investors. How can they cross the hurdle?

Dilshad Billimoria, Founder, Dilzer Consultants, says that there is a concept of ‘absolute time period’. It means that you have a buffer period before you meet your goal. So, if you are investing for a goal which is seven years ahead, you plan your SIPs in a way that all the instalements get at least one to three years before you meet your goal. Confused?

"You don't have to book profit mid-way, you just have to cut exposure to equities slowly with each passing year. If your last SIP installement goes in the fifth year, you should have 3-4 more years in the market to tide over near-term volatility and give enough time for all the money," says Billimoria.

So, how should investors go about their SIP investments? Mutual fund advisors say that direct investors should follow the basic rules of asset allocation. “Your asset allocation guides you- this is not just a statement. It is an actual rule. When you have seven years, you have a set plan for when to have how much equity exposure. When to stop investing and when to book profits should also be planned beforehand. You cannot stop your SIPs at once and take out the money. You will end up paying extra on it,” says Jha.
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Jha explains this with an example: If you have a goal to create a certain amount in 10 years. You are supposed to be 70-30 per cent in equity and debt in the first three years, you move to 50 per cent equity in five years and so on. Depending on your goal, your equity exposure decreases with time. At the end of seven years, you stop SIPs in your schemes. This gives your last investment enough time in the market. It also protects you from any market downturn when you near your goal.

Depending on the type of scheme you are investing, the last instalment of your SIP should be calculated, say these mutual fund advisors. Here’s an example: “If you are investing in a small cap scheme and you have an investment horizon of seven years, every instalment after the fifth year will be in a high risk zone. So, for small cap schemes, SIPs should be done ideally for more than 7 years,” says Billimoria.
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Billimoria also stresses on the taxation part of it. “If you suddenly stop your SIPs at the end of seven or 10 years, you pay taxes/exit loads on the instalments that didn’t complete a year. So, you should have a buffer of at least a year after you stop your SIP,” Billimoria says.
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