Investment Advice: How Many SIPs Should I Do with My Monthly Investment of $40,000?

Ans: Your decision to invest Rs 40,000 per month is commendable. Regular investing through SIPs is a smart way to build long-term wealth. Before diving into how many SIPs you should have or where to invest, we need to assess your financial goals, risk tolerance, and investment horizon.

Are you investing for a specific purpose? This could be for retirement, children's education, or wealth accumulation.

What's your time horizon? This will decide the nature of investments, whether short, medium, or long-term.

What’s your risk appetite? This will influence how much exposure you should have to equity, debt, or hybrid investments.

Let’s take a 360-degree approach to your situation and suggest an investment strategy.

Diversification Across Asset Classes
Investing in a variety of asset classes helps reduce risk while optimizing returns. SIPs give you a systematic way to invest in mutual funds across different categories, such as:

Equity Funds: These are ideal if you have a high-risk appetite and a long investment horizon of over 7-10 years. Equity funds can offer superior returns but come with market volatility. You could allocate a portion of your Rs 40,000 to large-cap, mid-cap, or multi-cap funds depending on your risk tolerance. Actively managed equity funds are a better choice here.

Debt Funds: If you have a medium risk appetite, debt funds are a safer choice for diversification. They provide stability and reduce overall risk. You might want to allocate part of your monthly investment to debt mutual funds for a balanced portfolio.

Hybrid Funds: These funds invest in both equity and debt, offering a mix of growth and stability. This can be a great option if you prefer moderate risk and want a balanced portfolio.

Equity Fund Allocation: Go for Active Funds, Not Index Funds
While index funds track the performance of market indices, they have limitations. They are passive, which means they cannot outperform the index. Active funds, on the other hand, are managed by professionals who aim to beat the market. Here’s why actively managed funds are better:

Potential for Higher Returns: Fund managers make informed decisions, which could potentially give better returns than the market index.

Better Risk Management: Active fund managers adjust portfolios based on market conditions, helping to manage risks more efficiently.

Flexibility: Active funds allow for tactical adjustments to mitigate market volatility.

So, instead of investing in index funds, you should consider allocating more towards actively managed large-cap and multi-cap funds.

Number of SIPs: Balanced Diversification
You don’t need too many SIPs to achieve your goals. The key is to maintain balance and diversify wisely. Here’s a suggested breakdown:

3 to 4 SIPs: This should be enough to achieve proper diversification. Too many SIPs can make tracking performance cumbersome and lead to overlapping investments.

One Equity Fund SIP (Large Cap or Multi-Cap): This would give you exposure to top-performing companies, providing potential for long-term capital appreciation.

One Mid-Cap or Small-Cap Fund SIP: For higher returns, allocate a small portion here, but remember, mid-cap and small-cap funds are riskier.

One Debt Fund SIP: For stability, especially if you’re looking for moderate risk.

One Hybrid Fund SIP: This offers a balanced mix of equity and debt, providing both growth and stability.

By spreading Rs 40,000 across 3 to 4 funds, you can build a diversified portfolio that suits your risk tolerance.

Regular Funds: The Benefits of Professional Guidance
If you're thinking about direct mutual funds, it’s important to understand the downsides. Direct funds can appear cheaper, but regular funds offer distinct advantages. Here's why regular funds, through a certified financial planner, are better:

Professional Advice: A certified financial planner (CFP) helps tailor your investments to your specific goals, risk tolerance, and financial situation. This is critical in achieving long-term success.

Ongoing Portfolio Management: Regular funds come with advisory services that help you make adjustments when needed. You won’t have to navigate complex financial markets alone.

Convenience: Regular funds save you time, as the advisor handles all the paperwork and processes.

So, instead of opting for direct funds, it's wiser to invest through regular funds with the guidance of a certified financial planner. This ensures that your portfolio stays aligned with your goals and risk appetite.

Managing Risk Through Asset Allocation
Diversifying across equity, debt, and hybrid funds is just one part of the equation. Asset allocation is key to managing risk. Here’s how you can think about asset allocation based on risk profiles:

High-Risk Appetite: If you're comfortable with higher market volatility and aiming for higher returns, you could allocate 70% to equity funds and 30% to debt or hybrid funds.

Moderate Risk Appetite: If you prefer a balance between risk and returns, a 50-50 allocation between equity and debt funds may work better.

Low-Risk Appetite: If you’re conservative, you could allocate only 30% to equity funds and the remaining 70% to debt funds for stability.

Adjust your asset allocation based on your comfort with risk and market volatility.

Emergency Fund: Don't Overlook This Critical Step
Before you invest the entire Rs 40,000 in SIPs, it's essential to ensure you have an adequate emergency fund in place. An emergency fund should cover at least 6-12 months of living expenses. This will ensure that you don't have to redeem your investments prematurely in case of any financial emergencies.

If you don't have an emergency fund yet, you might want to allocate a portion of your Rs 40,000 towards building it. You can invest in low-risk options like a liquid fund or a savings account for this purpose.

Monitoring and Rebalancing Your Portfolio
Once you’ve started your SIPs, it’s important to periodically review your portfolio. Market conditions change, and so do your financial goals. Here’s what you need to keep in mind:

Review Annually: At least once a year, check if your asset allocation is aligned with your financial goals.

Rebalance If Necessary: If one asset class has grown significantly more than others, rebalance to maintain your desired asset allocation.

Adjust As You Near Your Goal: If you’re nearing a financial goal, consider moving more money into safer debt funds to protect your capital.

By regularly monitoring and rebalancing, you’ll keep your portfolio on track for long-term growth.

Liquidity and Flexibility
SIPs offer excellent liquidity, meaning you can stop them or redeem units as per your financial needs. However, it’s wise not to redeem investments prematurely unless absolutely necessary. Early withdrawals can disrupt the power of compounding and reduce long-term wealth creation.

Ensure that your investment choices align with your future financial plans and maintain liquidity in non-SIP investments like emergency funds.

Final Insights
Investing Rs 40,000 per month through SIPs is a significant step towards financial independence. The key is to diversify smartly, allocate based on your risk tolerance, and regularly review your portfolio.

3 to 4 SIPs spread across equity, debt, and hybrid funds provide the right balance.

Avoid index funds and opt for actively managed funds to potentially outperform the market.

Regular funds through a certified financial planner offer better guidance and portfolio management than direct funds.

Have an emergency fund in place before you start your SIPs.

Keep an eye on tax-efficient investments to maximize returns.

Remember, consistency and discipline are the keys to long-term wealth creation. By staying the course, your investments will compound, helping you reach your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in