How to boost your Mutual Funds SIP Returns
SIP stands for Systematic Investment Plans, which is one of the wisest ways of investing in Mutual Funds for anyone. With SIP, the investor is still involved in the share market but with much lesser risks. That is why so many middle class investors look for SIPs as a wise approach of investing in stock market.
What do we mean by SIP?
A layman should understand SIPs as recurring deposits in which you keep depositing a fixed amount every month for a fixed period of time and get an assured returns. Just like there is a minimum amount of deposit required in recurring deposits, mutual funds too need a minimum fixed deposits every month.
What is the benefit of investing in SIPs?
The benefit of investing in mutual funds is that you can buy it at different levels and you always have the advantage of getting it at lower prices. This is one of the main reasons why most of mutual funds investors take the SIP route in order to average out the entire cost of purchase.
The below mentioned example would clarify it more clearly:
The Average NAV is calculated like this:
The Average Purchase cost of the Mutual Funds Units would be
In this case, Mr. A keeps investing Rs 2,000 for a period of twelve months through SIP, however the average cost of the SIP per unit comes out to be Rs 15.48, which is much lesser than the average cost of NAV, i.e. Rs 18.75 per unit.
We now hope that this would have clarified the concept of SIP to you. We can now move one to see how we can maximize returns through investing in SIPs.
How to Maximize Mutual Funds Returns through SIP investment?
Method 1: Stay Put for Longer Term
As a normal practice most of the investors invest during the market surge and do not invest during the plunge, however, this is one practice that defeats the purpose of SIP investment, altogether. On the other hand, if you stay invested for a longer term, you get the opportunity to live the Complete Market Cycle and thus have the timing to even out the market volatility. This in turn enables you to bank the advantages at a much lower prices.
Whereas, if you exit the market during a slump, you miss the opportunity of buying additional units when the prices are downing further. These are actually the additional units which could have given you the edge when the market bounces back. This is one of the approaches practiced by smart investors. This is one of the reasons why it is advisable to hold the mutual funds for a longer period in order to get the maximum output from SIPs.
Method 2: Your Portfolio should hold sufficient number of Mutual Funds
Your portfolio would look more diversified if it has more than 3-5 different schemes within it. As a matter of practice, it is advisable to have more than 5 mutual funds at a time, unless you have that extra money to put all your eggs in the same basket by investing in share market.
Let’s take an example here. If you can spare out Rs 7,000 during a month for SIP, instead of investing Rs 1,000 in seven different schemes, you can invest Rs 1,500 in four schemes and the remaining Rs 1,000 in another scheme. This way you would be able to diversify your portfolio.
Apart from the number of schemes to be invested, you should also ensure that all your money/schemes are not targeting the same industry/sector so that even if there is a downfall in one sector, your entire money should not be at stake. For example, all your money should not be pointing to just banking sector, even if you wish to.
Method 3: The Step-Up SIP Approach
Nothing in this world is constant and SIPs are no exception. When you income rises, your savings should ideally go up too. In that way, your SIP investment should also go up in the same proportion. The extra money you can spare due to rise in income every year should not necessarily be invested in altogether a new scheme only, but can also be allocated to your existing mutual funds as well.
The Step-Up Approach helps you to keep pace with your changing lifestyle and increasing earnings and inflation.
Method 4: Multiple Investment Dates for SIPs
Share Trading has never been a child’s play in a volatile market like India. The market can give you jolts at any time and none of the investors are really sure of the downward or upward movement within the market.
The performance of any mutual fund is largely impacted by the volatility of the market. If you want to be secure about your various schemes of investment, you should set dates of investment of various schemes at different dates. For example, if you have 4 SIPs every month, you can set the investment dates as 01st, 08th, 15th and 22nd of a given month. This way, if the market comes down in the first half of the month, at least two of your SIPs would lie in safe zone.
Method 5: SIPs should be linked to Financial Goals
Each of your investment plan should be aptly backed by a goal. Any investment without a goal carries lesser meaning and is not a success in totality. The goals could be long term goals as well as short term goals. They could be as short as savings for a holiday or as long as a retirement security.
If you attach goals to your investment plans, you would exactly know where you have to go with this investment and this way you would be able to do justice to the investment. In fact, you should make it mandatory for yourself to link each investment to a short term or long term goal and see the financial investment in the same light.
For a short term goal, Debt Oriented Mutual Funds are the best bet, because the time horizon is comparatively lesser and the only concern you have is the safety of your investment. On the other hand, Equity Oriented Mutual Funds are the best option for a long term goal just because you can afford to take risk in a longer run.
Method 6: Mutual Fund Portfolios should be reviewed periodically
There are various international and national factors attached to the performance of a mutual fund. If there is any deviation in any of the factors, the performance of a fund is affected. We can take example of last year’s depreciation of Rupee which led to the Pharma and IT sector being one of the favorites. Same way, the new government at center is targeting the promotion of ‘Housing for all scheme’ by year 2022 and this would give a lot of boost to the infrastructural sector. In coming times, infrastructure sector could be a preferred choice for most of the mutual fund managers.
These factors keep changing every half year and this is why it is important to review your portfolio after every six months. If you feel you are not good at reviewing, you can always take help of a good manager.
Method 7: Follow Systematic Withdrawal/Transfer Plan
Systematic Transfer Plan, also known as STP is a smart way of transferring a particular amount from one type of fund to another. You can use STP whenever you have a huge sum of money in your bank account. Since your money would do no big good in your bank account, you can use this money to invest in liquid funds through STP. Therefore, if you want to maximize your overall returns through SIP, you can transfer your money lying in your bank account towards liquid fund and at a later stage towards equity funds.
SWP is another term you should be familiar with, which means Systematic Withdrawal Plan. You can start redeeming your units when your financial goals are nearing through SWP.
Last but not the least, Share Market is a place from where the word risk can’t be eliminated altogether. You can only follow smart ways to save yourself and your money as much as you can, however, the more you are in favor of taking risks, the higher your returns are going to be. Overall, it is your money after all and you should invest it according to the financial goals you have set in life.