Make Salary Day your Mutual Fund SIP investment Day

Many of us go on vacations with our families once or twice every year. A lot of planning and preparation goes into making our vacation an enjoyable experience. Tickets are booked several weeks or even months in advance to get the lower fares and convenient dates or times. Similarly, hotel reservations are well made in advance to save costs and for a comfortable stay. Most travelers also do a lot research about the places they are visiting, so that they can plan their itinerary and not miss anything in their travel destinations. When travel dates approach, family members begin packing their clothes, toiletries and other personal items; the packing itself can take several days depending on how big the family is. Finally, the night before you travel, despite all the preparation over the past several weeks there are still last minute things to do, e.g. buying camera batteries, medicines, packing your cell-phone charger etc.

Travelling for leisure is not just an enjoyable experience it is also very useful for body and mind. Travelling allows us to take a break from our routine lives and rejuvenate ourselves to face the daily grind again. It is therefore perfectly natural that we put a lot of effort in planning our travel.

However, the irony is that, very little planning usually goes into a far more important aspect of our lives – our personal finance. Planning and discipline are essential success factors in personal finance as well. Financial planning includes defining financial goals with timelines, asset allocation and making investment plans for each goal (where to invest and how much to invest) and try achieving the same through SIP investment.

As important as planning, if not more, is execution. I can give many examples in the field of business, where great strategic plans were let down by poor execution. I have seen similar examples in personal finances as well. Many people apply a lot of intellect in thinking about investments and finances, but lack of efficiency in execution results in many plans not coming to fruition. One of my relatives, working in a senior management position in a public sector company, will retire in about 3 years. This gentleman has been following and investing the stock market for years. He seems to be fairly knowledgeable about capital market, mutual funds and other investment products, yet most of his savings are in bank FDs and life insurance policies.

About two years back, he told me that he plans to shift his FDs to mutual funds tactically in market dips for retirement planning. He also discussed asset allocation with me and planned to have 45%:55% equity to debt mix in his portfolio. Over the last 2 years, I asked him several times when I met him, whether he made his mutual fund investments. The answer every time was that, he would make it shortly; sometimes he was worried about the Sensex rising too fast, sometimes he was confused whether to invest in large cap or midcap or balanced mutual funds. Whatever the reason for my relative’s inaction, the bottom line is that, all his savings are still in fixed deposits on which he is getting less than 5% post tax returns for the last 2 years. In the last 2 years, the Nifty rose almost 50% - so the opportunity cost of his inaction is quite substantial.

The problem in the example is that I just discussed was not with the plan. The plan was quite good, but the execution was not there. If you cannot execute a plan, then there is no tangible value in your plan. Management experts say that, efficient execution is often a result of good planning. Complex plans are difficult to execute, whereas simple plans are easy to execute. The complexity of my relative’s plan was related to his desire of timing his investments with market dips.

In this context you may like to read 10 common mutual fund investing mistakes that you should avoid

In a market like India, a pullback is often followed by a rally on the very next day. If you planned your mutual fund investments based on price correction, the next morning you will see the price up and you will hesitate to invest. The only way you can take advantage of price correction is by following intraday market and if you are confident about the market closing lower, asking your financial advisor to put in your investment in process but the NAV cut-off time, which is 3pm for equity funds; in order to execute your transaction within the cut-off the financial advisor may need to have signed forms and cheques beforehand. People who are in a full time job or have busy schedules may find it difficult to execute a mutual fund transaction based on intraday market movements.

A simpler way for my relative, to achieve his financial goal would have been to shift his FD corpus to a liquid fund and then transfer fixed amounts once or twice every month over a period of time to equity or balanced funds through Systematic Transfer Plans. Further, given his career stage (senior management position) and life stage (his children are grown up and settled in their own careers) he is likely to have substantial monthly savings. He should have started investing his monthly saving through SIP investment or Systematic Investment Plans in equity, balanced or income funds. Through SIP investment my relative could have taken advantage of volatility through Rupee Cost Averaging. Some months he would have invested at higher NAVs, but in some months he would also have invested in lower NAVs. If you have been investing through a systematic plan (SIP, STP etc.), there is no need for following the market on a day to day basis. All his transactions would have been in auto-pilot mode and he could have focused more on his work and family.

The keyword here for is Systematic. Systematic is the opposite of ad-hoc. Though systematic SIP investment (SIPs) is now becoming increasingly popular, a large number of investors in India still continue to make ad-hoc decisions for their investments. Some people wait for one-time cash-flows to make investments. Some people think that, the market is too high and wait for the market to correct; in bear markets, people think that, the market may fall further and wait for the market to bottom. Some people are too busy with their careers to make investments. Some may be simply negligent about their personal finance. The end result of lack of discipline in investments is often under-investing or not investing in the right asset; consequently such people are likely to fall short of their financial goals and be under stress later in life.

Benefits of SIP investment

Much has been written and said about the virtues of SIP investment. However, for the benefit of all readers, it is worthwhile to briefly recall benefits of systematic investing.

• SIP investment take adhocism out of investment decisions and help you invest in a disciplined way. The biggest advantage of SIP investment is that, you can invest in mutual fund schemes from your regular savings for your long term financial goals; you do not have to wait for one-time cash-flows. By investing your savings on a regular basis, you are putting your money to work to make more money.


• It is not possible to predict accurately how markets will behave; therefore, your regular SIP investment is invested both at the high and the low points of the market.


• One of the main advantages of SIP investment is its convenience. Through a simple one-time application you invest in a disciplined way in an auto-pilot mode. The SIP amount gets automatically debited from your bank account on a particular day(s) of the month (specified by you) and gets invested in the mutual fund scheme of your choice.


• The other advantage of SIP investment is that if offers a lot of flexibility. You can start SIP with a minimum amount of Rs 500 to Rs 1,000 in most AMCs. AMCs also offer a choice of dates on which the SIP amount will get automatically debited from your bank through ECS.

What is the best say for SIP?

As far as stock prices and scheme Net Asset Values (NAVs) are concerned there is no systemic advantage of investing on one particular day versus another day in monthly SIP investment. Some financial bloggers suggest that, investing towards the end of the month may have slight advantage due to the Futures and Options expiry effect on stock prices, but there is no statistical evidence of any significant effect (please see our blog post, SIP in Mutual Fund: Best dates to do mutual fund SIPs).

For SIP investment you should choose date according to your personal situation. The most important consideration in choosing the date is ensuring sufficient funds in your bank account for the SIP transaction to go through. If the SIP transactions do not get executed for three consecutive months due to insufficient funds, then your SIP will get cancelled. Most salaried people get their monthly salary credits either in the last week of the current month or within the first one or two working days of the next month.

In most households, payments for fixed expenses like home loan EMI or rent, school fees, electricity bills, salaries of household staff etc. are all scheduled in the first week of a month. After spending for our fixed or regular expenses, the rest of our income gets spent on discretionary items like leisure and entertainment, one time purchases, so on so forth.

The risk of having insufficient funds in your bank account is much lower at the beginning of the month than towards the end. Therefore, scheduling your SIP instalments towards the start of a month lowers the risk of SIP instalments not going through due to insufficient funds. By scheduling your SIP instalment on your salary day, you eliminate the risk of your investment not going through ‘due to insufficient funds’ in your bank account.

Read why not start a SIP when you get your salary

There is another advantage of scheduling your SIP investment early in the month. It can help you discipline your spending habits. Some readers may question, why do we want to prioritize SIPs over our current needs? We have a variety of needs, some are essential, while others are discretionary. Essential needs like EMI, rent, school fees, utility bills, insurance premiums etc. cannot be compromised. You should plan your SIP investment only after you have budgeted for your essential needs. SIPs should be prioritized over your non-essential or discretionary spending. This is because, your investments in future, may pay for your essential needs. Some discretionary spending can over time become a habit and form a part of your lifestyle. You may find it difficult to change your lifestyle habits and this may have an impact on your savings.

Let us now see what would have been the return of your SIPinvestment had you started your SIP on your salary day, assuming your salary day is 1^st of every month –

SIP investment of Rs 5,000 in the last 5 years (1^st Jan 13 to 1^st Jan 18) in SBI Magnum Multicap Fund would have grown to Rs 5.47 Lakhs against your investment of Rs 3.05 Lakhs. The fund has given 23.29% annualized return.

During the same period, SIP investment in SBI Magnum Balanced Fund would have grown to Rs 4.82 Lakhs against an investment of Rs 3.05 Lakhs. The fund has given 18.19% annualized return

Conclusion

Having a fixed day for your SIP investment early in the month, ideally the salary day, will help you manage your expenses better and ensure disciplined investing. You can also create wealth over a sufficiently long investment period. By making your salary day the SIP day, you will be able to control your expenses and most importantly, financial plan will be on track.

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