Investing in mutual funds through a Systematic Investment Plan (SIP) is a strategy that many investors rely on.
SIP mutual funds
Through SIPs, you benefit from disciplined investing, rupee-cost averaging, flexible contribution amounts, professional management, and convenient auto-debits. SIPs’ dominance in the investment market is evident with the fact that the number of SIP accounts reached an all-time high of 9.34 crore in July 2024.
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While SIPs inherently offer countless benefits, you can further maximise your returns by implementing smart practices. Learn all the tips and strategies below.
1. Start early, invest regularly
The sooner you begin, the longer your money works for you, which leads to potentially higher returns over time due to the power of compounding. Early investment allows you to take advantage of the market’s long-term growth, even with small, regular contributions. It’s not about timing the market but giving your investments the maximum possible time to mature.
2. Leverage SIP calculators
An SIP calculator is a useful digital tool that can help you visualise the growth of your mutual fund investments over time. All it requires is three inputs, i.e., your contribution amount, expected rate of return, and investment duration. It also allows you to experiment with different scenarios, like adjusting the investment period or contribution amount, to see how these changes affect your potential returns. This can help you better plan for your financial goals and understand how much you need to invest regularly to achieve them.
3. Choose the right fund
Assess your financial goals, risk tolerance, and investment tenure to choose the right fund. For long-term goals, an SIP in equity funds is usually more suitable as they offer higher growth potential, though they come with more risk. If you prioritise capital preservation and lower risk, debt funds could be a better choice. Hybrid funds, which combine equity and debt, can offer a balanced approach. Also research the fund’s past performance, expense ratio, and the credibility of the fund manager before finalising a decision.
4. Stay committed during market volatility
During market volatility, it's natural to feel confused about continuing your SIP investments. However, this is precisely when staying committed can be most beneficial. Market downturns allow you to purchase more units at lower prices and reduce your average cost per unit over time. This strategy, known as rupee-cost averaging, helps cushion your portfolio against short-term fluctuations and positions you to earn higher returns when the market recovers.
5. Increase the SIP amount with income growth
As your income grows, it’s wise to increase your SIP contributions to keep pace with inflation and rising expenses. Many fund houses offer top-up SIP options that allow you to automatically increase your investment amount periodically. This approach helps preserve the purchasing power of your mutual fund investments and accelerates wealth accumulation.
6. Never put all eggs in one basket
While an SIP in a single fund can be effective, diversifying across different asset classes, sectors, and geographies can minimise risk and boost returns. For example, you might invest in a mix of large-cap, mid-cap, and sector-specific funds to capture growth across different market segments. Also consider adding debt, gold, or international funds to your portfolio for lower risk and optimised returns.
7. Leverage tax benefits
SIPs in Equity-Linked Savings Schemes (ELSS) offer dual advantages, i.e., the potential for high returns and significant tax savings under Section 80C of the Income Tax Act, 1961. These funds allow you to reduce your taxable income by up to ₹1.5 lakh annually. This tax benefit, combined with compounding returns, can substantially boost the overall efficiency of your portfolio.
8. Review your funds’ performance
The major objective of every investor is to earn the maximum returns possible. To achieve this, it's very important to regularly evaluate your chosen fund's performance by comparing its returns against relevant benchmarks and similar funds. Look at factors such as consistency in performance, any changes in fund management, and current market conditions. If a fund consistently underperforms relative to its peers, it may be time to reallocate your investments to better-performing alternatives.
Be smart, invest in SIP plans today
As you can see, maximising returns with SIP mutual funds is possible if you are smart, strategic, and disciplined. Start early, choose the right funds, use SIP calculators, capitalise on tax-saving funds, and diversify across different asset classes and sectors. It's equally important to remain committed even during market volatility, gradually increase your SIP contributions as your financial capacity improves, and rebalance your portfolio as needed.
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