In the year 1990 the Bombay Stock Exchange sensitive index popularly called Sensex was approx. at a level of 1,000. All of us know that in January 2008 the Sensex had crossed the level of 21,000. Thus, obviously over this period of time equity stocks and equity funds have given good returns to their investors. However, a very large part of our population has not participated in this long bull run of the Indian equity markets primarily because of the fear of volatility that equity markets are categorised by. People read headlines about markets crashing or markets scaling new peaks and are confused about when and how to invest. Here we present a 3-step simple process for investors to help them save for their long term financial lifecycle needs. The basic thing to understand is to treat investing in equity as a savings alternative. What this implies is that like we save money in bank deposits, we should save money in equity linked instruments and keep it over long periods for optimum returns.

The first step involves deciding on what amount of money a person wants to save from his or her monthly pay packet which can be put into equities. As a thumb rule, it is normally said that one should invest that percentage of one’s savings into equities which one can keep away for a period of 5 years. That percentage of one’s savings which if the market suffers a temporary setback does not affect the investor adversely. Typically, it is advised that out of one’s total savings one should invest 80 minus one’s age as a percentage into equities. Thus, a 40 year old person can invest 40% of his savings into equities. As one’s age increases, the percentage invested in equities keeps coming down along with the risk profile of the overall investments. Thus, out of one’s pay packet based on one’s age, family lifecycle, risk appetite, time horizon for investing the amount to be saved and put into equity oriented instruments can be decided.

The second step of this process involves deciding on what particular kind of product to invest. In case a person can spend time doing research on various stocks, only then it is advisable to invest in equity stocks. Individual stocks carry risks associated with the performance of these companies. Apart from this, individual stocks carry risks associated with the overall market conditions as well as with technical factors like liquidity in the stock, ownership of the stock by large institutional investors and news flow related to the industry which it operates in. All these are out of control of the investor. Thus, only if an investor can spend long hours and has the skill set to research individual companies should they decide to invest in companies. Alternatively, mutual funds present a very good avenue for investing into equities. A mutual fund typically invests in about 30 to 35 stocks and is managed by a professional fund management team whose job is to keep studying a number of companies, analysing them to decide which of these the fund should invest in or sell out off. The portfolio of these funds is mostly declared every month and the fee charged is typically around 2% on a trail basis. Thus, for a small fee a person can conveniently invest in a mutual fund and get the services of a professional fund manager while monthly benefiting from the transparency of disclosure of the entire portfolio. Having decided that equity funds are a good avenue for investing, a person is now faced with the dilemma of which particular fund to invest in. Here the most common advice is to choose a fund house which one is familiar with and which has a long term track record in India. After that one can choose a diversified equity scheme from this particular fund house as one’s product of choice. If a person wants to diversify further, he or she can choose maybe not one but three different fund houses and one diversified equity scheme for each of these different fund houses. After having chosen the scheme in which a person wants to invest in, one has to decide the process and mode of investing which is covered in step 3.

The last step involves deciding on how to invest. An individual is well advised not to put all his money at one instance into a fund. Typically, a person should invest a fixed amount every month over a long period of time (3 years) to get the benefit of averaging out the cycles in the market. Thus, if you want to invest Rs.36,000, instead of investing the entire amount at one shot, it is well advised to invest Rs.1,000 a month over a 36-month period. This is called systematic investing. The plans of this nature are available with most mutual funds and are called Systematic Investment Plans or SIPs for short. SIPs have several benefits. The most important benefit is that irrespective of whether the market is going up or down, a person is investing in the market a fixed amount every month thus evening out the risks associated with sharp market falls. In addition, it also enforces a discipline of savings and investing in equity markets. We have seen earlier in this discussion how over long periods of time equity markets in growing economies like India have delivered returns which are superior to most alternative investment opportunities.

Long term studies have shown that the SIP route is convenient, it eases the pain of investing at a level of the market and finding that the market has fallen from there, it helps in a disciplined savings process and above everything else it provides the benefits of equity oriented investing for large number of individuals who are not experts in markets. Systematic Investment Planning as a way of channelising financial savings to meet one’s financial lifecycle goals has been accepted globally as possibly the best way of investing especially for investors who do not have enough time or skills to analyse individual companies or the market itself.

Having decided on the amount to invest, having chosen the fund house and the scheme in which one wants to invest and having decided on the systematic investment planning way of investing a person may now need to find out a convenient financial advisor who can help them in the investment process. While there are a large number of investment advisers and financial planners in the country, most banks today offer such advice through their various branches. One easy way of finding out a financial planner nearest to one’s location is by visiting the website of the Association of Mutual Funds in India (www.amfiindia.com).

We started this discussion by talking about how a large percentage of our population which is academically literate but financially illiterate has not benefited from the significant uptrend that Indian markets have witnessed over the last decade and a half. Sometimes it appears paradoxical that in recent times large part of the participation in the Indian market has come from overseas investors known as Foreign Institutional Investors (FIIs) and not from our own domestic investors. Given the fact that the long term fundamentals of the Indian economy would possibly imply that if one puts money away into equities through a systematic plan, one can benefit, Systematic Investment Planning provides an opportunity for long term savers to channelise their savings productively into instruments which can help them plan for their financial lifecycle needs of the future.