Three reasons why short-term MF SIPs make sense

This may sound very strange to you. When everyone is advocating mutual fund systematic investment planning for the long term, what is the necessity for this debate on 'Is MF SIP for the short term or long term?'

Theoretically, investing in a mutual fund SIP for the long term works for investors. But for practical reasons we need to commit a mutual fund SIP for the short term as well. That is we need to break that long term into six monthly or annual periods and commit your SIPs for these durations.

Then at the end of the sixth month or a year you must renew your SIP for another six months to a year. You need to renew like this till you complete your predetermined long-term period (say three years).

You may think it is an unnecessary paperwork and waste of time. But you will be completely convinced when you have finished reading this article.

Ramalingam K, an MBA (Finance) and certified financial planner, is founder & director of Holistic Investment Planners (P) Ltd (http://holisticinvestment.in).

Here are three practical reasons why you must also have short term MF SIPs.

1. Contribution towards mutual fund SIP changes

How much you are contributing towards mutual fund SIP changes over a period of time.

• At the beginning of a career a person will be able to commit mutual fund SIP for a small sum. As s/he progresses in her/his career, s/he will be able to increase her/his contribution towards mutual fund SIP.
• Similarly, when someone reaches a stage where s/he needs to spend more on kids' higher education, daughter's wedding, buying a house or meeting a major financial commitment, it is difficult for her/him to continue the same amount of mutual fund SIP contribution.
• So whenever you renew your mutual fund SIP at the end of the sixth month or one year, you can look at your cash flow position and based on that you can renew the mutual fund SIP for the increased amount or the same amount or the reduced amount.

2. Portfolio review

Also it gives you a chance to review your portfolio with your advisor once in six months or one year.

• The scheme, which you have chosen for mutual fund SIP, is performing well when compared to its peers or not? You need to review this periodically. The scheme may turn out to be a laggard.
• The scheme may be performing well when you started SIPs. But over a period of time, it could have derailed from its performance. This is something like our cricket players. They will be in a good form in the game for some period of time. Then, in the next match, they lose their form. So you need to periodically check whether the fund is performing now or not.
• If you are committing a mutual fund SIP for 10 years, then the advisor may not be coming back to you whenever you call him for reviewing your portfolio. If you commit for six months or one year s/he will be definitely coming to you for renewing the mutual fund SIP. You can have a review with her/him at that time.

When you commit mutual fund SIP for the long term, generally we ignore to review it. It may generate poor returns. You can avoid this by periodic review.

3. Equity exposure in overall portfolio

How much equity exposure you can give to your overall portfolio can change the amount of mutual fund SIP in equity and debt.

• As the age goes up, your ability to take risk comes down. So you need to change your equity mutual fund SIP contribution periodically.
• How close or distant you are to achieve your financial goals will also decide your equity exposure. If you have got long period to achieve your financial goal then you can have more equity exposure. When you have short period to achieve your financial goal, then you need to reduce your equity exposure.
• Rebalancing your portfolio based on your predetermined asset allocation will also decide your equity exposure.

All this can change your mutual fund SIP amount in equity funds.

So committing a mutual fund SIP for long term looks good on paper. For practical reasons you need to commit for short term and renew it at the end of every short term till achieving your financial goals.

In this regard, instead of committing a mutual fund SIP just like that, having a long-term financial plan and committing mutual fund SIP based on that plan will be really fruitful. This will make a huge difference in achieving your financial goals.