One of the most common advice questions we get from our investors is usually, "I can save x thousand dollars every month. I would like to invest in mutual funds through SIP. Please suggest funds to me. ". We are delighted to receive such letters, because systematic investments in mutual funds are the best way to turn savings into effective investment vehicles. In this article let me talk about a simple method to build a good SIP wallet.
1. First, decide on the asset allocation – By asset allocation I mean how much money is going each month into which type of mutual fund. It is possible to get very complicated with this, but to keep it simple, you can focus on just three types of funds: large cap funds, small / mid cap funds, and debt funds. A typical allocation would be 50% in large cap oriented funds, 20-30% in small and mid cap oriented funds and the remainder in debt funds. To ensure stable and optimal returns, every SIP portfolio should contain a debt fund component. It may only be a small portion – 20-25% of the monthly investment, if your portfolio is an aggressive long term portfolio.
2. Second, decide on the number of plans in your portfolio – Since we have three blue chip asset classes as above, your portfolio should contain at least three plans. On the upper side, it shouldn't have more than seven-eight revs. More than that, and your portfolio becomes difficult to track and manage. Ideally, a portfolio would have five plans – four equity plans and one debt plan.
3. Third, decide on the diagrams – this is the last thing when designing the portfolio, not the first. Once you know what type of programs you are looking for and how many of each type (from steps 1 and 2 above), this step becomes an easy choice. You can check out research websites like valueresearchonline.com or Mint 50 and see their top rated funds. You can simply pick one or two from each class you are interested in and you will have your portfolio ready!
Let's take a simple example and walk through the process to illustrate. Suppose you want to invest Rs. 10,000 per month in a moderately risky portfolio of mutual funds for the next 3 to 5 years. We can decide to go for a portfolio of 70% stocks, 30% debt. In equities, we can decide to have 50% large cap oriented allocation and 20% small-mid cap oriented allocation. We will need two plans focused on large caps (Rs. 2,500 each), a small / mid-cap system (Rs. 2000) and a debt system (Rs. 3000) in which to invest.
Sample SIP Wallet
We see that we can choose two funds from the top rated funds in each of these categories. For large cap funds, Blackrock Top 100 DSP, HDFC Top 200, Birla Sunlife frontline equity and Reliance Regular Savings Fund – Equity; for small / mid-cap funds, the ICICI Discovery fund and DSP Blackrock Small Midcap; for debt funds, Templeton India Short term Income Fund.
As we can see, building a well diversified and balanced portfolio like this is very easy. Regular and systematic long-term investment in such a portfolio would be a great way for investors to convert their monthly savings into a great investment portfolio. Good investment!