What is a SIP?
A SIP or a Systematic Investment Plan allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically an equity mutual fund scheme.
Why should you SIP?
One, it imparts financial discipline to your life. Two, it helps you to invest regularly without wrestling with market mood, index level, etc. For example, if you are supposed to put a fixed amount every month in a mutual fund scheme, you need to find time to do it. When you have the time, you might be worried about market conditions and think of postponing your investments. Or you might be thinking of investing more if the mood is optimistic. SIP puts an end to all these predicaments. The money is automatically invested regularly in a scheme without any effort on your part.
As you have understood the concept of SIP, it’s time to see how to maximize returns through SIP route of investment in mutual funds.
1. Stay Put for Long Term
People tend to invest when market surges and stop when the market plunges but this practice defeats the basic purpose of investing through SIP. Staying Invested over the Complete Market Cycle enables you to even out the market volatility and allows you to bank the advantage of lower prices.
2. Hold Sufficient Number of Mutual Funds in Portfolio
Diversification can be achieved by having 3 to 5 mutual fund schemes in your portfolio. You should not have more than 5 mutual funds unless you have surplus money and want to dip all your fingers into share market. For example, if you wish to start SIP of Rs.7,000 per month then instead of putting Rs.1,000 in 7 schemes, you can invest for Rs.1,500 in four and Rs.1,000 in one scheme to maintain the diversification of your portfolio.
3. Step-Up SIP Approach
Nothing is Constant nor should your SIP. With the rise in your income, your savings will go up. So your SIP amount should also increase in the same proportion. The increment is not necessarily be invested into a new scheme you can allocate the increased amount into existing mutual funds also.
4. Choose Multiple Investment Date for SIP
Market volatility indirectly impacts mutual fund performance, thus to mitigate this impact you should fix the SIP at different dates of the month. For instance, if you have 5 mutual funds in your portfolio, then you could fix different SIP dates for each of the mutual fund like 1st, 8th, 14th, 21st and 28th. So if the market goes down on 8th, only one of your mutual fund schemes gets affected.
5. Link SIP to Financial Goals
You should target Debt Oriented Mutual Funds for your short-term goals because the time horizon is less and safety should be your first concern. Likewise, you should target Equity Oriented Mutual Funds for your long-term goals because the time horizon is not a problem so you could take some risk here.
6. Use a Systematic Transfer/Withdrawal Plan
Systematic Transfer Plan (STP) means transferring a fixed amount from one type of fund to another. STP can be used when you have a large chunk of money in your bank. Instead of parking money in Bank, you can transfer money into liquid funds and then get a fixed amount transferred into chosen equity funds via STP. This transfer of money from the bank to liquid funds and then liquid funds to equity funds will maximize your returns.