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The benchmark Nifty 50 is down almost 8% over the past month and about 3% for the past year. Mutual fund investors have been subjected to a painful correction. Returns over longer time periods are also sluggish. The Nifty 50 has just delivered roughly 9% CAGR over the past 3 years. However, mid cap funds on average have given only 3.5% annualized over the same period and small cap funds have given just 2.5%. It is difficult to determine how much further this correction will run in the face of pain in the real economy – FMCG and auto sales have been poor in recent quarters. However fund investors can utilise a powerful tool at their disposal to take advantage of the correction – SIP or Systematic Investment Plan.
Why SIP
An SIP invests a fixed amount each month into a mutual fund. It thus accumulates fewer mutual fund units when the Net Asset Value (NAV) is high (market is doing well) and more mutual fund units when the NAV is low. As a result, an SIP will automatically accumulate more units in corrections such as the present one. If you have a fixed sum to invest from the sale of property or a bonus at your job, you can deploy your money through an STP instead. An STP or Systematic Transfer Plan is a close cousin of the SIP. In an STP, you invest the lump sum in a liquid fund and the STP transfers a fixed amount every month to an equity fund. In effect it works exactly like an SIP.
An SIP works best in equity funds. Debt funds accrue interest income over time and hence are more suited to lump sum investments. Hybrid (balanced) funds combine both debt and equity. However, increase SIPs in these funds will not give you the full benefit in case of a market correction. Within equity funds, you must select between large, mid and small cap fundsdepending on your risk profile and time horizon. Note that you should have a time horizon of at least 5 years to invest in equity mutual funds. The Mint 50 is a curated basket of mutual funds which you can use for your fund selection process. If you wish to cautiously take advantage of the market correction, stick to large cap funds
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