A Systematic Investment Plan (SIP) in a mutual fund scheme allows you to invest through small, regular instalments. It is a disciplined and convenient approach that encourages consistent long-term investing. However, to truly maximise the potential of your SIPs, it is essential to follow a few smart strategies. This article explores some key tips to help you get the most out of your mutual fund SIPs.
Mutual fund SIPs - 6 tips to follow
- Start your SIP as early as you can
While it is never too late to start a SIP, beginning early in life offers several advantages. Most importantly, it gives you time. A longer investment horizon allows you to start with smaller amounts while still potentially building considerable wealth over time. It spreads your financial commitments across the years, which reduces your stress. Starting early also lets you benefit from compounding. The returns you earn are reinvested, which helps you potentially earn more.
So, the earlier you start, the better your chances of accumulating higher returns in the long run.
- Top-up your SIPs periodically
SIPs offer automation, which can be a major advantage. It removes the stress of actively managing your investments. However, while being convenient, this can also make it easy to forget about your SIPs.
It is important to periodically review and top up your SIPs to ensure your investments continue to grow, keep up with inflation, and align with your evolving lifestyle and financial goals. You can aim to increase your SIP each year or at major milestones, such as when you get married, have children, get a promotion, etc.
- Invest in multiple mutual fund schemes
Diversifying your mutual fund portfolio can help reduce risk, however diversification can not eliminate the risk totally. Instead of investing all your capital in a single scheme, you can consider spreading it across different funds. Let's consider the following example:
Say you plan to invest Rs 15,000 per month. Now, instead of investing all the money in one mutual fund scheme, you could allocate Rs 5,000 each to a large-cap fund, a mid cap fund, and a small-cap fund. This way, you gain exposure to funds from various market capitalisations.
- Commit to your mutual fund SIPs for the long-term
A longer investment horizon can potentially boost wealth creation. Mutual funds, except the Equity Linked Savings Scheme (ELSS), which has a three-year lock-in, offer easy liquidity. However, while you can make frequent withdrawals without penalties, these can interrupt the compounding process and reduce your potential returns.
To truly benefit, it is important to give your investments time to grow uninterrupted. Avoid withdrawing early and stay committed to your SIPs for the long haul unless it is absolutely necessary.
- Start SIPs on different days of the month
The market moves up and down over time. As a result, mutual fund Net Asset Values (NAVs) fluctuate as well. Spreading your SIP dates across the month allows you to take advantage of these fluctuations.
This strategy can help average out your purchase cost and make the most of emerging opportunities. If you have multiple SIPs, it can be a simple and effective approach to consider.
- Build a tax-efficient mutual fund portfolio
ELSS offer tax deductions under Section 80C of the Income Tax Act, 1961. In addition to diversifying across sectors and market caps, it also helps to include tax-saving funds in your portfolio. Adding ELSS funds alongside other mutual fund schemes allows you to reduce your tax liability and save more, while continuing to grow your investments.
Conclusion
While multiple factors influence average SIP returns, the tips above can help you potentially grow your investments and achieve your financial goals. That said, remember that your final returns may vary based on market conditions and individual fund performance.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
