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 I came across an article on the Systematic Investment Plan which says that at the age of 35, if one invests Rs 20,000 every month for 25 years, the investor will land up with more than Rs 6 crore (Rs 60 million).

I have a few questions regarding this.

1. Is it a good idea to continue with SIPs for a such a long time?

2. Do I have to keep investing without talking out my money for 25 years?

3. How much of risk is involved in this strategy?

4. What are the other implications?

- Rajneesh Mohanty

An SIP is a vehicle offered by mutual funds to help you save regularly.

It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund.

The minimum amount to be invested can be as small as Rs 500 and the frequency of investment is usually monthly or quarterly.

When the Net Asset Value (price of a unit of a fund) is high, you will get fewer units. When it drops, you will get more units.

As you can, it helps you make money over the long term. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time. So you tide over all the ups and downs of the market without any drastic losses.

The long-term issue

How long you would like to keep the money invested is a very personal decision. It would depend on a host of factors like your saving goals, income, expenses and other investments. 

But, when investing for the long-term, it is always a good idea to invest systematically.

By and large, when investing in shares, it is best to stay in for the long haul. Because that is when you get the best returns. So, if you are referring to an equity mutual fund, then you should consider staying in for a number of years.

Having said that, I would like to caution you that your job does not end after starting an SIP. You should keep a track of the performance of your fund on a continuous basis.

• Why you should watch over your mutual fund
• Is your fund safe?

Keep a tab on your investment

When you invest in a fund, don't just put in your money and forget about it.

Watch over it.

Certain changes may take place over a period of time that can make the fund you chose now unattractive. If this is so, then consider selling your units and getting out.

This is very significant if the fund manager changes. Track your fund's performance and portfolio closely if this happens. The new fund manager may be more aggressive and you may find the fund too risky for your liking.

Look at their portfolios. The funds keep coming out with a quarterly portfolio declaration. You can also keep tabs by visiting your fund's Web site.

See if too much money is going into one sector. If you find that the fund is too centered on one sector (remember we are talking of diversified equity funds here) and it makes you uncomfortable, you should consider getting out.

Ditto if you find too much money invested in one stock. But, look at it proportionately.

For instance, a fund manager may invest Rs 100 in Company A and his total portfolio may be worth Rs 1,000. This means he has invested 10% of his portfolio in Company A.

Another fund manager may invest Rs 200 in the same company, but his total portfolio may be Rs 5,000. So, though Rs 200 is more than Rs 100, it is just 4% of the fund's portfolio.

Or, the fund may stay diversified but show a steady decline in performance. But do be careful when comparing the performance of the fund. Compare it with the stated benchmark and other funds in the same category. To get a better grasp on this, read How to compare mutual funds.

• Should you worry if your fund manager changes

The risk factor

The strategy to invest systematically carries a much lower risk than investing at one go.

If you buy all your units at one time, specially at the height of a bull run, then chances are you would have paid a hefty NAV. Should the markets go through a bear phase after that, you could lose heavily. Unless you are willing to stay put till the next bull run.

But, if you invest via an SIP, even if the markets go through a prolonged bear phase, you will end up losing much less than a person who would have invested at one go initially.

However, if you buy the units at a low NAV when the stock market slumped, and this was followed by a bull run, you will stand to gain tremendously. In such a situation, you can take full advantage of the bull run. Here, investing at one go works for your benefit.

Sounds good in theory. In reality, the markets are unpredictable. No one can say when the markets have bottomed out (so you can buy units) and when they have peaked (so you can sell them).

Since no one can time the stock market, it is always better to take the SIP route.    

• Why an SIP is not always great
• How risky is your mutual fund?

The cost factor

Another advantage is that many funds waive the entry load if you invest through the SIP mode. This is a fee that is levied when you buy the units of a mutual fund. It is a percentage of the amount you are investing.

And, if you do not exit (sell your units) within a year of buying the units, you do not have to pay an exit load (same as an entry load, except this is charged when you sell your units).

If, however, you do sell your units within a year, you would be charged an exit load. So do keep your money invested for a few years at least.

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