Starting October 1, you can set up a systematic investment plan (SIP) in a mutual fund for a maximum of 30 years. Earlier, you could set up SIPs without an end date (perpetuity). In this article, we look at whether this revision will impact your goal-based investments.

Managing regret

Each time you make an investment in an equity fund or an exchange-traded fund, there is a possibility that you might regret the decision in the future. Why? The stock market could decline immediately after you make an investment. SIP is an investment process that helps you manage regret by distancing yourself from an investment decision. This is possible because SIPs are set up as auto-debits from your savings account.

What should be the tenure of your SIPs? Your SIP in index funds must align with the time horizon for your life goal. For instance, if the time horizon for a goal is 10 years, then the SIP in an index fund must be set up for 10 years. Your SIP in an active fund for your goal-based investments must be set up for 12 months, whatever be the time horizon for your life goal.

This is because your objective of investing in an active fund is to earn greater returns than the fund’s benchmark index (called alpha). You must, therefore, check if the fund has earned positive alpha each year before you renew the SIP for another 12 months.

It is from this perspective that you must consider the recent rule relating to the tenure cap on SIPs. The revision should not impact your investment process. Why? Your intermediate goals such as buying a house and funding your children’s education will have a time horizon of less than 30 years. Typically, retirement portfolio would carry a time horizon of more than 30 years, but only if the SIP on an index fund is set up immediately upon the start of one’s career.

Conclusion

Setting up long tenure SIPs could have one issue — your bank account linked to the SIP. What if you do not operate the bank account through the tenure of the SIP? To ensure that your SIP mandate is continually fulfilled, it is important that you maintain a separate savings account to manage your investments in equity funds and recurring deposits. Call this your master investment account. It is a savings account that you should maintain preferably till you retire. This account must be funded with auto-debits from your salary account every month.

(The author offers training programme for individuals to manage their personal investments)

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