Last Updated on February 12, 2022 at 6:18 pm
Don’t be fooled by those who stand to profit from your investments! SIP is NOT systematic investing! Starting a mutual fund SIP and continuing it through market ups and down has nothing to do with systematic investing. Buying mutual fund units on the same of day of each month is automation. It has nothing to do with “discipline” like sales guys, investment portals (“direct”/”regular”) and product manufacturers would have us believe. Automation simply means do the job repeatedly using machines or technology. Most people automate the task of buying mutual fund units without having a “system” of purchase and management.
Anything – especially investing – without a system, cannot be called as “systematic investing”.
Just to make things clear:
systematic investing = investing(automated or manual) with a system of active risk+return management.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
A SIP is just automated investing. SIP is NOT a system of risk/return management (that blah blah about “averaging” unit price is useless BS – see below)
The problem is most people assume SIP is the system and that is nonsense.
If you are confused at this point, I don’t blame you. The extent of brainwashing done by the media and financial services is extensive. So let us take this step by step. I have said this multiple times, I hope it won’t hurt to say it again in this context.
Investing with a goal and without
There is nothing wrong with investing without a goal, but if you have one, the management after investing starts becomes so much easier.
Investing starts and ends with risk management.
- Investing in so-called risk-free instruments like FDs has risks like inflation, taxation and lower rates when you reinvest.
- Investing in risky assets may lead to loss of capital and loss of time before possible recovery.
So it is common sense that the first step is to invest some portion in risk-free assets (fixed income) and some in risk (equity). This proportion is known as asset allocation.
Asset allocation depends on when you need the money (which is why a goal matters). If you need the money in the next couple of years, having any or more of equity can be dangerous. Even if you need the money decades from now, asset allocation cannot be constant. As time passes, a gradual shift from equity to fixed income is essential. Unless you factor that in now, you will make the mistake of not investing enough.
Once the asset allocation is identified, we choose product categories in fixed income and equity. The categories should have the necessary liquidity (ability to withdraw at will) and reasonable taxation. Then from within each chosen category, products are selected.
The products from the same asset class, especially risky ones should be diversified. That is, choosing a large-cap fund + mid-cap fund with little overlap between them or choose a single multi-cap fund. Check out these Minimalist Portfolio Ideas.
SIP is NOT systematic investing
Then and only then comes the investing. Most people are in such a hurry to “start investing via SIPs”. Then they are in a hurry to get returns. Being impatient when patience is necessary and being patient when impatience is required is perhaps the greatest human folly.
The point of this post is, if you have started investing via SIPs without any thought about asset allocation, diversification and how these things need to change with time, you are NOT investing systematically for the simple reason that you do not have a system. Sure, people from the financial services will massage your ego and tell you that you are on the right path. The fact is, whether you invest with a system or not, you are on the right path for them.
There is more to it. After you start investing, comes the risk management. Since returns from equity can fluctuate up and down, you need to watch out for deviations from your asset allocation. Reset it to the desired level, once a year initially and more often as the time for the goal approaches (again why it is important).
Then you need to understand how to review the performance of volatile instruments. Those bloggers who wrote “top 10 best mutual funds for 2018” will not tell you how to review a mutual fund portfolio. Because they are busy reaping the rewards of stupid folk who take such articles seriously.
If you can do all this at least after starting SIPs, you are investing systematically. Merely starting a SIP is NOT systematic investing. The people most likely to disagree with this article are those who stand to profit from SIPs. That is a conflict of interest for you. Those who make the loudest noise are often the infected ones (with conflict of interest).
Timing the market IS systematic investing!
Timing the market or in other words changing the asset allocation based on market conditions is most definitely systematic investing. Again provided there is a system present. Those who blindly do it assuming returns will improve have no idea about the purpose of timing the market – manage risk.
Those who understand the basics of risk management will know that it is more important to protect the amount invested from market volatility than to “time” the next investment.
SIP is NOT systematic investing because it does not reduce risk!
I have shown this multiple times that returns can be anything with a SIP as the risk is not managed.
Do not expect returns from mutual fund SIPs! Do this instead!
Beware of Misinformation: Mutual Fund SIPs Do Not Reduce Risk!
Dollar Cost Averaging aka SIP analysis of S&P 500 and BSE Sensex
Don’t get too comfortable with equity: This is how a real market crash “feels” like
Create a start-to-finish financial plan
Use the freefincal robo advisory template to handle all the above-mentioned aspects.
Resources for managing risk and reviewing your portfolio
Here is a list of posts I have written on this topic
How to Review Your Mutual Fund SIPs
Review Your Financial Freedom Portfolio in Seven Easy Steps
How to review a mutual fund portfolio
How to systematically reduce the risk associated with a SIP
Repeat:
systematic investing = investing(automated or manual) with a system of active risk+return management.
SIP is just the investing bit. Either you develop a system of your own or consult a SEBI registered investment advisor who does not get any commissions from your investment and works only for you: Fee-only India: launch of a movement to serve investors and advisors
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
Use our Robo-advisory Tool to create a complete financial plan! More than 3,000 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
🔥Join our community of 9000+ users! 🔥Avail massive discounts on our courses + freefincal investor circle!
Track your mutual funds and stock investments with our Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds, ETF screeners, as well as momentum and low-volatility stock screeners.
You can follow our articles on Google News
We have over 1,000 videos on YouTube!
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
Connect with him via Twitter(X) LinkedIn YouTube
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
Our book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
Your Ultimate Guide to Travel
