Make your clients’ payday, their SIP day

Systematic Investment Plan (SIP), as we all know, is an efficient way to build wealth over time and a rewarding strategy in itself.  The key benefits are:

• The investor does not need to deploy a huge lump sum upfront
• Instils the good habit of investing regularly and systematically
• Makes timing the market irrelevant
• Inculcates the needed financial discipline
• The volatility is mitigated with rupee-cost averaging
• Enables the power of compounding
• And SIPs assists in financial goal planning. 

For these very reasons, SIPs have been gained popularity amongst both retail and HNI investors.

  Table: SIP contributions over four financial years

Data as of October 2019
(Source: www.amfiindia.com)

The total SIP AUM is Rs 3.03 lakh crore, while the total SIP accounts or folio are 2.89 crore as on October 31, 2019, as per the AMFI data.

Financial advisors undoubtedly have played a pivotal role in the success of the Mutual Funds Sahi Campaign launched by AMFI in 2017 and today SIPs have become a household name.

Like recurring deposits that were considered a preferred avenue for regular investments earlier, today investors are exuding confidence in SIPs, taking the risk and deploying their hard-earned money in mutual funds in pursuit of better returns. This is at a time where the real rate of return clocked by traditional instruments such as bank fixed deposits does not seem very effective from a financial planning point of view.

That being said, if financial advisors counsel clients to make their payday the SIP day, it can go a long way.

Legendary investor, Warren Buffett said, “Don’t save what is left after spending but spend what is left after savings”. It is important to disseminate this valuable piece of advice to clients.

Irrespective of the net monthly take-home of a client, financial advisors should encourage them to save more and park the hard-earned money they save in productive investment avenues.

Today, many fund houses allow choosing a specific SIP instalment date besides the usual practice of selecting default dates, i.e. 7^th, 10^th, 15^th, or 20^th of every month on the application form for monthly SIP instalments.

If financial advisors after paying attention to the cash-flow of investors/clients specify the SIP instalment date, it can prove to be a more meaningful exercise – instead of following the usual practice.  

When clients are doing well, earning respectable increments, bonus, etc., they should be encouraged to step-up their SIPs.  Here are two ways to step-up SIPs:

1. By a fixed rupee-basis each year. So, say if the client has a monthly SIP of Rs 10,000, it can be  increased every year by Rs 1,000 or Rs 2,000 as per his/her requirement; or
2. By a fixed percentage basis each year, say by adding 10%-20%, to the current monthly SIP year- after-year.

The advantages of stepping up SIPs are that it helps counter inflation better and adds to the power of compounding, facilitating the accomplishment of financial goals comfortably.

Note that certain mutual funds allow investors to automate the step-up (also known as top-up,) while for others you need to provide a manual request via mandate.

If the client goes through a financial crisis, pausing monthly SIPs is an option. A form in this regard needs to be submitted at least 30 days prior to the SIP date from which the investors wants to pause the investment. Most fund houses give you the option to pause your SIP payments for a period ranging from 3 to 6 months.

But missing out on SIP instalments or pausing SIPs for long holds back wealth creation and may not be in the interest of their financial wellbeing. Hence, if the client has missed/paused SIP, the financial advisor should suggest making up for the missed and/or paused SIP instalments vide additional purchases in a lump sum manner when they have the investible surplus.

Equity market volatility should not be the reason for the client to pause SIP. Educate him/her that volatile market condition or correction, on the contrary, work in favour of SIPs.

How long should be the SIP tenure?

The SIP tenure should ideally be aligned in congruence to the time horizon before the envisioned financial goals of a client are realised.

Plus, a sensible portfolio rebalancing is necessary when the client approaches financial goals. When the client is just a few years away of the envisioned financial goals being realised, exposure to equity-oriented funds must be gradually reduced and the wealth created should be shifted to less risky instruments such as fixed deposits, ultra-short duration funds and liquid funds.

Conclusion

Devising a sensible approach (paying due attention to risk profile, broader investment objective, financial goals, time to achieve the goals and asset allocation), providing superlative guidance, research-backed recommendations, reviewing the portfolio, and handholding clients in the wealth creation journey is the responsibility of every financial advisor.

Happy SIP-ping!

Jimmy Patel is the CEO of Quantum Mutual Fund.

The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.