Mutual Funds SIP Investment: 3 golden lessons for people to get more money - dos and don'ts

Mutual Fund SIP Investments: On paper, Equities and SIPs (Systematic Investment Plans) are a powerful combination. Take any middle quartile equity Mutual Fund, throw in any 10-year SIP period from the past, and you will probably discover that their annualized returns handsomely outperform those from all other asset classes. It is unfortunate that not all investors who begin SIP’s actually go on to earn these published returns in real life.

Speaking on the benefit of Mutual Funds SIP, SEBI registered tax and investment expert Jitendra Solanki said, "Mutual Funds SIP help an investor to develop adequate wealth from very small amounts of money as in this option, investors can start investing even when they don't have a lump sum amount for investing at one go. SIP mode helps an investor to start investment in the early phase of career and go long till retirement."

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Mayank Bhatnagar, Chief Operating Officer, FinEdge said, "If you are an investor who is struggling to come to terms with successful SIP investing, follow these three rules, they can help an investor to maximise return." Here they are:

Rule 1: Really understand how they work
Many investors who migrate to SIP from fixed return assets like recurring deposits and PF, tend to do so with a below average understanding of how they really work. Attracted by past returns ranging from 12-14% over 5-10-year periods, they get in without realising that these returns are, in fact, non-linear in nature. There have been countless instances wherein SIP returns have been negative for the first two or three years, only to cross double digits on a compound annualised basis within weeks or months! The magic of SIP’s can only be fully realised through complete dispassion, high levels of patience, and discipline. If low return phases frustrate you, or you’re investing via SIP with the expectation of consistent yearly growth, you’ll never realize their full potential. So do bear in mind that setting your personal expectations with respect to your SIP journey is very important.

Rule 2: Do Not Keep Stopping and Starting
Perhaps the worst thing you can do with your SIP is to stop and start based on the ups and downs of the equity markets. To understand why, it’s important to know how investors generally react to market cycles. Bullish cycles invoke euphoria, and most investors start their SIP near the end of these bull markets, as they feel confident by seeing encouraging past returns. Bearish cycles breed despair and fear, and most investors stop their SIP after markets have already fallen. In doing this, investors take away a large portion of the wealth creation potential of SIP, because the biggest benefit – Rupee Cost Averaging – no longer accrues. In fact, stopping and starting your SIP in this manner will keep the average cost of your acquisition higher than prevailing Net Asset Values at most times, resulting in disappointing long-term returns. So, understand that for your SIP to work, you must take your emotions – and market timing – out of the equation. Stopping and starting them frequently can only over result in a bad outcome.

Rule 3: Align them to your Goals
Systematic investments into volatile growth assets work best when they’re aligned to clearly defined, specific and measurable goals. Interestingly, we have observed that random number SIP such as Rs. 3681 per month continue longer and with more discipline, than round figure SIP such as Rs. 4000. This is likely because the former was started after a reverse calculation from a target amount, for a specific goal such as your retirement or your kid’s education; whereas the latter was started on an ad hoc basis. For best results, get a Financial Plan made before starting your SIP’s, and track your progress.