Hi, i invested in multiple funds through SIP. I will stop the SIPs 2 or 3 years after and start with new set of SIPs from different fund house invest and discontinue this after 2-4 year. I do this activity in order to avoid continuous averaging in the same fund. So the continuous average may not grow as like only 2-3 years investment fund. Ex, I have Nippon fund, invested around 55k and stopped 2 years back now the return is 123%(within 5yr). Likewise my over all portfolio annualized return is 20%. So i want to know the way I'm investing is that correct, kindly help me. L

Ans: Reevaluating Your Investment Strategy
Your strategy of discontinuing SIPs every 2-4 years and switching to new funds is unique. However, it's essential to understand that stopping SIPs forcefully isn't always necessary. Instead, you might consider other strategies to optimize your investments.

The Importance of SIP Averaging
SIP averaging helps you manage market volatility by spreading your investments over time. This reduces the impact of market fluctuations on your portfolio. By continuing SIPs, you benefit from rupee cost averaging, which can lead to lower average costs and better long-term returns.

Assessing Fund Performance
Only discontinue SIPs if the scheme consistently underperforms compared to its benchmark or peers. Regularly review your funds' performance, ideally once a year. If a fund consistently underperforms, it might be wise to switch. However, if the fund performs well, continuing your SIP can be more beneficial.

Benefits of Stepping Up SIPs
Instead of discontinuing SIPs, consider a Step-Up SIP strategy. This involves gradually increasing your SIP amount, enhancing your investment without the need to switch funds frequently. Here are the benefits:

Compounding Growth: Increasing your investment amount periodically allows you to benefit more from compounding.

Inflation Adjustment: Step-Up SIPs help you adjust for inflation, ensuring your investment keeps pace with rising costs.

Goal Alignment: It helps you align your investments with your growing income and financial goals.

Implementing a Step-Up SIP Strategy
Implementing a Step-Up SIP strategy is straightforward. Here’s how you can do it:

Annual Increase: Decide to increase your SIP amount annually by a fixed percentage, such as 10-15%.

Income Linked Increase: Increase your SIP amount whenever your income increases, like after a raise or bonus.

Set Reminders: Use financial apps or set reminders to review and increase your SIP amounts regularly.

Evaluating Funds for Step-Up SIP
When choosing funds for Step-Up SIPs, consider the following factors:

Consistent Performance: Select funds with a track record of consistent performance over different market cycles.

Fund Manager Expertise: Look for funds managed by experienced and reputable fund managers.

Expense Ratio: Choose funds with a reasonable expense ratio to maximize your returns.

Benefits of Long-Term Investment
Continuing SIPs in well-performing funds for the long term has several advantages:

Rupee Cost Averaging: Long-term SIPs smooth out market volatility and reduce the average cost of investments.

Compounding Effect: Staying invested for the long term allows your investments to benefit from the power of compounding.

Reduced Transaction Costs: Fewer switches mean lower transaction costs and taxes, enhancing your overall returns.

Role of a Certified Financial Planner
Working with a Certified Financial Planner (CFP) can provide valuable guidance in implementing a Step-Up SIP strategy. Here’s how a CFP can assist:

Personalized Advice: A CFP offers tailored advice based on your financial goals, risk tolerance, and investment horizon.

Portfolio Review: They conduct regular portfolio reviews to ensure your investments align with your financial goals.

Tax Efficiency: A CFP helps you optimize your investments for tax efficiency, minimizing tax liabilities.

Managing Risk with Step-Up SIPs
Risk management is crucial in any investment strategy. Here’s how Step-Up SIPs can help manage risk:

Diversification: Spread your investments across different asset classes and sectors to reduce risk.

Asset Allocation: Maintain a balanced asset allocation based on your risk tolerance and investment horizon.

Regular Monitoring: Keep track of your portfolio’s performance and make necessary adjustments to stay on track.

Tax Implications of Step-Up SIPs
Step-Up SIPs can have tax implications, which need careful consideration:

Capital Gains Tax: Long-term and short-term capital gains tax apply to your investments based on the holding period.

Tax Planning: Collaborate with your CFP to plan your investments in a tax-efficient manner, optimizing your returns.

Aligning Investments with Financial Goals
Aligning your investments with your financial goals is essential for success. Here’s how to do it with Step-Up SIPs:

Short-Term Goals: For goals within 2-4 years, consider funds with lower volatility and stable returns.

Medium-Term Goals: For goals within 5-7 years, a mix of equity and debt funds can balance risk and return.

Long-Term Goals: For goals beyond 7 years, equity funds with a proven track record of long-term performance are ideal.

Final Insights
Your strategy of discontinuing SIPs frequently might not be necessary. Instead, focus on monitoring fund performance and implementing a Step-Up SIP strategy for better averaging and compounding growth. Work with a Certified Financial Planner to align your investments with your financial goals and optimize your portfolio for long-term success.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in