The Rs 1 Crore Question: Is A Traditional SIP Still Enough?

There is no shortage of investment options for young investors today. A systematic investment plan (SIP) in a mutual fund may still be the starting point for many, but some are also putting money into newer options such as cryptocurrencies, real estate investment trusts (Reits) and infrastructure investment trusts (InvITs). 

With so many choices available, it can be tempting to spread money across everything. But a portfolio does not necessarily become better just because it has more investments.

For someone starting young with a long-term wealth creation goal, equity can still remain the core of the portfolio. A traditional SIP may not sound exciting, but its biggest strength is the ability to combine regular investing with the power of compounding over a long period.

For younger investors, an 80:20 equity-debt portfolio may not sound particularly exciting, especially when newer investment options are gaining attention. But Arjun Guha Thakurta, executive director, Anand Rathi Wealth, says investors should not lose sight of the basics.

The numbers illustrate why. Looking at the Nifty 50 since 1997, equity has delivered returns of more than 10 per cent in nearly 80 per cent of the periods, according to Thakurta. Its Sharpe ratio has also been around 1.25 since 2012, he says. This does not mean investors should ignore diversification, but it does underline the importance of keeping equity at the centre of a long-term portfolio.

For instance, if an investor has a goal of Rs 1 crore over 20 years, they would have to put in around Rs 10,000 per month for 20 years to reach that goal. If they choose a step-up SIP with a step up of 10 per cent every year, they can reach that goal even faster within 16 years, or they could start with an SIP of around Rs 5,000 and increase it over time to achieve the same Rs 1 crore corpus. This shows the power of compounding through SIPs and how investors can harness this over the long term to achieve their goals.

Diversification is important in any portfolio, but it should depend on an investor’s time horizon. Investors should divide their portfolio into three baskets - one for the long term, one for the medium term and one for the short term.

Thakurta recommends keeping the allocation linked to the time for which the money is being invested. Money that may be needed in the short term can remain largely in debt, where liquidity is more important. For medium-term goals, he suggests a 70:30 split between equity and debt. For investments with a horizon of more than five years, he recommends moving to an 80:20 equity-debt mix.

The idea, he says, is to give equity enough room to drive long-term growth while keeping some debt in the portfolio to provide balance.

If investors wish to diversify beyond this, there can be different avenues. In the debt space, investors in the highest tax bracket can opt for arbitrage funds that provide debt-like returns with equity-like taxation. If investors wish for exposure to gold, they should ensure it serves as a replacement to debt in the portfolio within the 20 per cent, and not equity.

“We, however, don’t recommend exploring beyond mutual funds. Those who have built a large enough corpus can look into structured products that provide fixed-income types of return. But beyond this, investors should refrain from investing in other asset classes just for the sake of pursuing newer investment options,” says Thakurta.