Tips for Smart Investing in Mutual Fund SIPs
By Akhil Chugh
Date Jan 05, 2025
SIP – Think of it as your reliable financial companion, offering you access to market-linked returns.
Systematic Investment Plans (SIPs) serve as a pathway to building wealth over the long term through consistent, incremental investments. These plans enable you to steadily accumulate savings in mutual fund schemes, guiding you toward achieving your financial objectives.
In essence, SIPs represent a methodical approach to investing a predetermined sum in any fund or scheme at regular intervals. By navigating through market fluctuations, SIPs ensure that the investment costs average out over time.
Systematic Investing entails:
- Committing to a fixed investment amount
- Consistently investing over a sustained period
- Working towards a specific financial objective
However, maximizing the benefits of SIPs requires strategic planning and thoughtful execution. In this blog, we’ll explore five tips to help you make the most of your SIP investments and achieve your financial goals.
Tips for Smart Investing in Mutual Fund SIPs:
1. Link your SIP to goals:
For any investment to be successful, understanding your financial goal is key. The goals can vary from retirement planning to child education planning.
Goal-based investing is all about identifying your financial goals, setting a timeline for each one of them, and investing for them regularly via SIP to be able to reach them. Mapping out all your needs gives you a clearer picture and the time for which you need to stay invested to achieve each goal. Even the type of risk you should take will be defined by your goals. The importance of goal-based SIP is that it not only gives you a good investment strategy, but also a direction to achieving your dreams and in the process making your future stress-free.
The benefits of SIP can be amplified by aligning your SIPs to your respective financial goals. For example, as you progress with age your risk appetite comes down and so should your equity allocation. At some point, you will find that your SIPs in equity are actually redundant to your asset mix. The answer is to shift from equity SIP to a debt SIP if warrante
2. Start early:
Beginning your investment journey early ensures that you allocate more time to savings and growth. The regularity of investments offered by SIP, coupled with an early start ensures that you generate adequate returns on your investments.
To help put things into perspective, here is a little representation of the impact of delaying investing.
Mr. A & Mr. B are working professionals and are expected to retire at the age of 60. Mr. A starts monthly SIPs of Rs 30,000 in equity mutual funds at the age of 30 years, giving him 30 years to accumulate the desired retirement corpus. On the other hand, Mr. B starts monthly SIPs of Rs 45,000 in equity mutual funds at age of 40 years, leaving him with 20 years of investment horizon to accumulate the corpus.
Let us assume that they both invest in an equity mutual fund with an inflation-adjusted annual return of 12%,
As evident from the above illustration, even though Mr. A and Mr B invested same amount of money over their respective investment horizons but Mr B could not accumulate a corpus anywhere close to Mr. A (Which is >2x) because he started late.
Thus, it is essential to start SIP early to maximize your returns in mutual funds.
3. Top-up your SIP with rising income:
Sticking with the same investment amount while investing for the long term via regular SIPs will provide you with good returns. However, to make sure that you get the best growth from mutual funds increase your SIP amount every year via SIP Top-ups. Just increase it by 5%-10%, based on the increment in your annual income and you can see the huge impact it will have on your total corpus.
Let’s understand it with an illustration.
Suppose, Mr. Suri wants to save money for his retirement in 25 years. He decides to start a SIP in a chosen mutual fund scheme. By investing Rs 50,000 each month and assuming a return of 12% p.a., Mr. Suri can reach a corpus amount of Rs 9.5 crores in 30 years.
However, if Mr. Suri decides to top up his SIP amount by 10% every year, he can increase the accumulated corpus amount to Rs 21.4 crores in the same time period of 25 years. Now, Mr. Suri can afford to spend a more comfortable and luxurious retirement life.
Below is the graphical representation of two strategies:
4. Avoid early withdrawal:
Financial crunch can arise anytime and to meet these unexpected situations you may choose to stop and withdraw your SIP investment. Knowing the volatile nature of the market, if you exit when the market is low, your portfolio value would be less. While systematic withdrawal can be a great tool to supplement your income, avoid using this early in your investment journey. This should be done once you are nearing your financial goals and reaching your retirement age. Moreover, once you choose to take systematic withdrawals, ensure you are only withdrawing the returns part of the investment and the principal portion is intact so that it can keep generating returns for you.
5. Periodic Reviewing & Rebalancing:
For a profitable mutual fund investment, reviewing and rebalancing the mutual fund schemes portfolio at regular intervals is as important as investing in them regularly. So, keep a track of your investments and check the performance of your schemes at least once in 6 months. If you find that the scheme is not performing well for a very long time and is lacking behind in comparison to the peers, you should consider stopping the SIP and switching to a different one. To make sure that you can easily track your investments, opt for online investment portals like Net Brokers.
Net Brokers Takeaways:
- In order to get the maximum returns from your SIP, you should start early and invest systematically over long tenure to maximize your returns.
- Remain disciplined in your investments and do not get disturbed by volatility. SIPs help you take advantage of market volatility by rupee cost averaging.
- Increase your SIPs every year with a rise in your income. This will boost your wealth substantially in the long term.
- If you have 5 goals, then don’t try and spread across 25 SIPs. That is just too complex to handle. Stick to 6-8 SIPs at best but ensure that each SIP is specifically tagged to specific goals. It will ensure that the purpose of each SIP is clearly known.
SIP makes money work hard for you but it is in your hands to ensure that SIPs work continuously in your interests and in the interest of your long-term goals.
Remember, patience and discipline are your best allies in the journey of SIP investments.
Get in touch with us today to learn more about how to make your existing SIPs more rewarding.
Download our mutual fund app & start investing for your long-term financial goals.
Happy SIPs!