SIP Tips: Mutual fund investment through a systematic investment plan (SIP) is gaining popularity since it allows people to start with a small amount of money, gives compounding, instills discipline for saving money, and gives the comfort of stopping investment at any time. One of the advantages of SIP investment is that even if the market is low and you keep investing, the recovery is significant when the market rises. SIPs in the last few years have given an average 12 per cent return. 

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"SIP is a disciplined way of investing in stock markets, which eliminates the need to time the markets and helps investors benefit from volatility in markets. Investors can start investing in the market with smaller amounts, and it offers flexibility to gradually increase the amount as they grow into their careers," says Dikshit Mittal, Fund Manager and Senior Equity Research Analyst, LIC Mutual Fund Asset Management Ltd.

Another advantage of investing through SIP is that you can start investing in many of the funds with an amount as little as Rs 100.

"A single mutual fund gives you a diversified portfolio containing many high-quality securities. You can start buying a fund with as little as ₹500 a month. For example, you could buy a Nifty 50 fund, which contains 50 of India’s largest and most profitable companies with a stellar track record, says AR Hemant, AVP, Bankbazaar.com.

Though mutual fund returns depend on market conditions, the choice of funds, and the amount invested, there are ways through which you can make the most of your SIP investment.

We spoke to renowned mutual fund managers and market analysts to learn how we could make the most of our SIP investment. Know here-

How you can make the most of your SIP investment

Start Early

If you are an early starter in your SIP investment journey and have patience to invest for a long duration, you may accumulate huge wealth by the time you are 50.

"If one invests in a monthly SIP of Rs. 10,000/- for 5 years, 10 years, 15 years, and 20 years at an assumed rate of 12 per cent CAGR, the approximate corresponding corpus generated at the end of 5 years would be Rs. 8 lakh, in 10 years, it would be Rs. 23 lakh, in 15 years, it would be Rs. 50 lakh, and in 20 years, it would be Rs. 98 lakh," says Farhad Gadiwalla, Executive Vice President & Head,  Products, UTI AMC. 

If you start investing Rs 10,000 a month at the age of 25 and get a return at a CAGR of 12 per cent for the next 25 years, you will invest Rs 30 lakh in those years, while your expected returns will be Rs 1.90 crore.

It means that by 50, you will have nearly Rs 2 crore in your corpus.

"Compounding is considered the eighth wonder of the world, and SIP allows investors to benefit from compounding over the long term," says Mittal.

Invest Regularly

Since you have to invest a certain amount in your SIP every cycle, you become disciplined about saving money.

It's a good habit, but people become disappointed when the market goes down and their mutual fund investments turn red.

Many of them stop SIPs then.

That's a big mistake; it should have been inverse. It's time when they can top-up their SIPs.

"SIP serves as a method to navigate short-term market volatility, emphasising the importance for investors to avoid panic and impulsive reactions. It's common for investors to halt their SIPs during market downturns. However, SIP is particularly effective during market corrections, benefitting from rupee cost averaging," says Himanshu Srivastava, Associate Director, Manager Research, Morningstar Investment Research India Private Limited (formerly known as Morningstar Investment Adviser India Private Limited).

Increase SIP amount over time

If you are investing Rs 10,000 in SIP today, you can increase your investment with your income.

An effective way is to increase your SIP by 10 per cent every year. You can adjust that amount to your income every year.

E.g., if your salary is Rs 50,000 and you invest Rs 10,000 through SIP a month, there are chances that your salary will increase significantly in the next 10 years. So, 10 years down the line, your monthly SIP investment should be significantly higher than Rs 10,000. "Investors can further augment their corpus by topping up (increasing) their systematic investments periodically in line with their growing income profile. This allows investors to accumulate a substantially higher corpus over time without putting a strain on their finances and realise their dreams," says Gadiwalla.

Diversify your portfolio

Depending on your goals, you can opt for aggressive, moderate, or conservative investment planning, but it is always advisable that you diversify your investment to a great extent.

For higher returns, you can surely keep large, mid-, and small-cap mutual funds in your portfolio, but you should keep a good mix of debt, flexi-cap, contra, and ELSS funds in your portfolio to mitigate market risks.

Choose the right fund

When you begin your journey, it is tough to gauge the funds that will deliver good results in the future.

However, you can choose your fund based on your investment goals.

Before investing, ask yourself: do you want to buy a car, a home, create wealth, or accumulate wealth for your child's education and marriage in the long term?

You can do due diligence before picking the right funds, like the fund house, stock portfolio, duration of the fund, and returns in the last three years.

You can also speak to some consultants.

"Keep it simple: set your financial goals, start an SIP in the funds most suited for those goals, and then stay the course. Once a year, take stock of your funds’ performance relative to their peers. When you’re clear on your objectives and investment strategy, you should invest via direct plans for better returns," says Hemant.   

Optimise your portfolio

You can check the performance of your mutual funds every six months or a year.

If some of them are underperforming, you may think of replacing them.

But remember, mutual fund investment is not day trading, where you need to check the performance of your stocks every now and then.

Patience is the key to SIP investment. 

"Once a year, take stock of your funds’ performance relative to their peers. When you’re clear on your objectives and investment strategy, you should invest via direct plans for better returns. Avoid hyper-optimisation and know that sometimes your fund will underperform relative to peers," says Hemant. 

Stay patient

All your funds may not perform well all the time.

Secondly, if the market is going through a lean patch, you don't need to be disappointed or panicked.

The market bounces back in a fashion once the poor phase is over, as happened during the coronavirus, when many of the investors gained hugely at the time of market recovery.

Since the net asset value (NAV) of a mutual fund during a recession is down, one can take advantage of the situation by topping up their SIPs. 

"SIP allows investors to accumulate more units when markets are in correction mode and fewer units when markets are moving upwards, thereby helping them benefit from rupee cost averaging and may accumulate wealth over a period of time to meet their financial goals," says Mittal.

Don't time the market

One of the purposes of SIP is also to balance out losses once the market rises after a fall.

So, you don't need to time the market.

You just need to focus on investment and keep implementing our suggested strategies.

Expense ratio and commission

The expense ratio is the charge a fund house takes from you for managing your mutual fund.

The lower the expense ratio, the better for you. If you invest in mutual funds through a broker or a mutual fund platform, they may charge a commission.

Go for the one with a low commission.

Use a SIP calculator

There are many online SIP calculators available that show the expected returns you may get after investing in a particular mutual fund.

Through calculations, you can align your investment with your goals.

However, calculators give you only expected returns, as there is no guarantee that the past returns of a mutual fund will repeat themselves in the future.

But a SIP calculator gives you at least a rough idea of your returns.

With its help, you can surely avoid mutual funds that have fared poorly in the last three years.

"To get the best results from SIP, investors must commit themselves to long-term investing. Consistent and disciplined investing over an extended period can harness the power of compounding, significantly enhancing returns," says Srivastava.