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5 Simple Tips for Investing in SIP to Maximise Your Returns

SIP offers excellent investment opportunities in a time-bound and structured manner. As a prudent investor, you must know how to optimise returns on your investments in mutual funds through SIP. Read this post to find five crucial tips that will help you maximise your profits.

SIPs or Systematic Investment Plan is a way of investing in a mutual fund whereby the investment is made periodically. The period can be daily, monthly, quarterly or semi-annually.

Advantages of Investing in SIP

  • Compounding Returns:

    This means that your principal amount gets returns, and your returns also generate returns.

  • The benefit of Rupee Cost Averaging:

    SIP facilitates Rupee cost averaging to buy securities when markets are down and sell when markets are at a high.

  • Disciplined investment:

    In SIP, a fixed amount is deducted from your bank account at regular time intervals ensuring commitment and discipline.

While continuous investment facilitated by SIP assures wealth accumulation and fosters the habit of saving, many investors find it challenging to increase their returns.

5 Tips for Investing in SIP to Magnify your Return Potential

  • Begin Small, Begin Early

    Begining your investment journey 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.

    Let's consider this with an example;

    Two friends of the same age, Ravi and Jayant, invest in SIPs equally and earn similar returns. However, Ravi starts investing a little earlier than Jayant.

    Ravi starts investing at 25 years of age and invests Rs 10,000 every month through SIP and gets approx. 15% returns annually. Jayant, on the other hand, starts investing at the age of 35 and earns the 15% annual returns on investment. They both invest until they turn 60. This is how their portfolio would look like once they retire at 60.

    Particulars Ravi Jayant
    SIP Amount 10,000 per month 10,000 per month
    Duration of Investment 35 Years 25 Years
    Total Investment 42,00,000 (Rs 42 Lakh) 30,00,000 (Rs 30 Lakh)
    Average Growth Rate 15% 15%
    Portfolio Size at 15% growth rate Rs 14,86,06,449 (14.86 Crores) Rs 3,28,40,737 (3.28 Crores)

    As you can see, Ravi earned 4-5 times more than what Jayant earned by just beginning ten years earlier. Thus, it is essential to start early to maximise your returns in mutual funds.

  • Boost your Investment Regularly:

    This is because returns are directly linked to investments. More the investment, more the returns and vice versa. More so in the case of SIP where your returns also earn returns due to compounding.

    Let us understand this with an example,

    Two friends, Ravi and Jayant, start investing at the same time and invest Rs 5,000 per month in SIP which gives them both 12% returns. However, Ravi increases his SIP investment by Rs 5500 per month every year, whereas Jayant keeps it the same throughout the investment duration. This is what their portfolio will look like after the end of 20 years.

    Particulars Ravi Jayant
    SIP Amount 5000 per month for the first year and increases the SIP amount by 10% every year Rs 5000 per month throughout the duration
    Duration of Investment 20 Years 20 Years
    Total Investment 34,36,500 (Rs 34.36 Lakhs) Rs 12,00,000 (Rs 12 Lakh)
    Average Growth Rate 12% 12%
    Portfolio Size after 20 Years 93,46,955 (Rs 93.46 Lakhs) 46,14,751 (Rs 46.14 Lakhs)

    Therefore, it is advisable to opt for a SIP that gives you the leverage of increasing your investment amount overtime.

  • Set a Long-Term Goal:

    SIP is best suited to meet long term objectives and goals. This is because the returns generated get cumulated until the maturity and provide you with adequate finance to accomplish your goals.

    Let's understand this with an example,

    Two friends, Ravi and Jayant, decide to purchase a house after five years and ten years respectively.

    They invest the same amount, i.e., Rs. 20,000 in mutual funds through SIP. Assuming the market condition fetches them both a moderate rate of 10% over the years. At maturity,

    Ravi will have Rs.15,61,648 (Rs 15.61 lakh) whereas Jayant will have Rs. 41,31,040 (Rs 41.31 lakh).

    Clearly, Jayant has a higher amount. Thus, keep a long-term horizon in mind rather than investing for a short duration to reach your desired goal.

  • Avoid Withdrawing Early

    Financial crunch can arise anytime and to meet these unplanned circumstances you may choose to stop and withdraw your SIP investment. Knowing the unpredictable 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.

  • Review the Performance of Funds

    The primary objective of every investor is to earn maximum returns. Therefore, it is vital to keep track of how the fund is performing in the market. A negative performance graph exposes you to more risk and can influence your investment decision. You can withdraw your amount from that fund and invest it in another mutual fund that is performing well. However, look at returns of at least a few years before making a decision. Good asset managers can handle market volatility quite well to challenge the temporary conditions.

Be Smart, Start a SIP

SIPs enable you to sustain the dynamic nature of the market conditions and ensure that you save a significant amount for the future by proper planning and wisely choosing investing options. Start investing in mutual funds through SIP to enjoy long term benefits.