New Delhi, Rahul Jain. In today's time, people do not need to be told what is Systematic Investment Plan (SIP). They have emerged as a wise investment option in Mutual Funds. According to the Association of Mutual Funds in India (AMFI), the number of SIP accounts is 5.17 crore. Through these, investors invest in different mutual fund schemes. However, like any other investment option, it is important to understand every aspect of SIPs. This helps you to get maximum returns.
keep things simple
To get the best results from SIP, things should be kept simple. You choose the frequency of investment that you can easily give. It is a myth that the frequency of your SIPs determines the returns. At present, there are many types of SIPs, which allow you to time the SIPs according to the current market conditions.
For example, there is also a SIP which reduces the amount when the market is up and increases it during the downtrend. At first glance this idea seems perfect but it is not. In the case of most of the investors, it is difficult to increase the value of their investments in times of decline. On the other hand, it may also happen that at the time of market downturn, you may not have the necessary funds available to do so.
This case also looks like other SIPs. So SIP investing a fixed amount on a specific date is the best option.
have a long-term approach
SIP is like a test match, in which you need to be patient as well as disciplined. Studies show that the longer the tenure of the SIP, the higher the potential for double-digit earnings.
Generally, the decline in the stock market in India lasts for 12-24 months at a time. In such a situation, a three-year SIP also has the ability to compensate you for the loss and give the benefit of the boom in the market.
One thing to note here is that the real value of SIPs comes when the market is in a downtrend because then you can buy more units for the same price. This makes averaging the cost of purchase better. Stopping SIP at the time of market downturn can hurt you because then its real purpose remains incomplete.
start early
Investing early gives you time to grow your money and also helps you take advantage of compounding. Compounding has a manifold effect in the creation of wealth. Let us understand this with an example. Suppose you start a SIP at the age of 25 and deposit Rs 1,000 in it every month. You continue to do so until the age of 60. If you get 10 per cent return every year, then by the time you reach 60 years of age, the value of that investment would have become Rs 7 crore.
However, if you delay starting investments by even five years, the value of the investment falls to a little over Rs 3 crore by the time you turn 60. So, the sooner you start, the better it will be for you.
Separate SIP for each target
By linking SIP to the goal, you get a kind of purpose. This gives you the motivation to keep investing and you avoid withdrawing money early. Invest in SIP through equity funds for long term goals like higher education of children and retirement. You can choose liquid funds to build an emergency fund. Whereas, for medium term goals, you can bet on aggressive hybrid funds.
conclusion
The point to keep in mind here is that you get returns from investing in funds and not from SIPs. If you choose weak funds, then even SIPs will not help you in any way. So, choose a fundamentally sound fund that has a good track record. This will help you to increase the profit from your SIPs.
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