Smart strategies to make the most of mutual fund SIP

Juzer GabajiwalaVentura SecuritiesSystematic Investment Plan (SIP) route is one of the best approaches to investing in mutual funds. It is not only safer but an extremely convenient way of building wealth over the long term. Unfortunately, not many investors are able to harness the power of SIPs to their advantage. It has often been noticed that when the markets go down, many small investors stop or terminate their SIPs. This, in fact, defeats the whole purpose of investing through this mode. By stopping the SIP during a market slump, the investor forgoes the chance to buy more units at a lower price, which can yield a good return when the market turns around. Another major problem we face is that most of our investments are undertaken in a haphazard manner, without a goal in mind. Investing only to make money is a vague idea but if you link it with the goals that you have in mind, you will be headed in the right direction. SIP brings about a discipline to your investing process. The logic is: If we earn regularly and spend regularly then why not invest regularly.SIPs are not only for the long term. You could be saving for the down payment of your house, which is due 15 months in the future or for your child’s college education, which will begin three years from now. Here are some ways you can get the best out of your SIPs. Whether it is linking SIPs to goals, or increasing the amount every year in line with the increase in income, these ideas will help you maximize the gains from your SIPs.1. Link your SIP to goals:As an old saying goes, “A Goal without Plan is just a Wish”, so every investment plan you create should be backed by a goal.  It could be a short-, medium- or long-term goal. You can create an SIP for every goal, whether it is buying a car, going on your annual vacation or paying for your kid's education. However, you should be mindful of the fact that equity funds should be considered only if the goals are long-term in nature. Depending on the tenure, you should choose the level of exposure to equity. Thus, for your children’s education fees, which are due every year, it is best to start an SIP in a liquid fund.Investors should earmark separate SIPs for each financial goal. Here is a sample SIP roadmap for an investor for some popular goals: 2. Step up a yearly SIPAfter defining financial goals, most people lose heart — either they find the target amount too big to achieve or they do not have adequate monthly savings to start investing a prescribed sum in SIPs. For example, to accumulate Rs 30 lakhs in 15 years, you have to start investing Rs 6,500 each month in an SIP, assuming a 12% rate of return. Do not turn away from your plans even if you do not think you have adequate money.Although SIPs allows you to invest a fixed sum every month, it does not mean you stick to this amount over the entire tenure. As your income rises, your savings will also go up. The SIP amount should also increase in the same proportion.  The step-up SIP can have a dramatic effect on your long-term savings.  See the graph below; even a 10% increase in the SIP amount every year can give you a 45% higher value. 10% increase in the SIP amount can increase your corpus by 45% 3. Align your SIP To Your Cash FlowThe frequency of the SIP should depend on your cash flow. Most salaried employees get their salary every month. It is convenient for them to give an ECS mandate to their bank so that the money is deducted from their bank account on a particular date of every month. Generally, people prefer to do this transfer during the first week of the month. As the sum is deducted at the start of the month, this enables them to plan their expenses accordingly. It is always ideal to set up the SIP when the income flows in, rather than towards the end of the month.4. SIP - The best way to invest in ELSS funds Are you one of those taxpayers who run around to make tax-saving investments at the end of the year?  There are umpteen examples of investors rushing to investing just before the year-end for their tax saving. Investing a large amount at one go in an equity fund can be risky. Instead, it is better to spread out the investment across the year by starting an SIP in an ELSS fund in April itself. We did a back calculation and found that an investor, who started investing Rs 5,000 a month in an ELSS fund from April 2010, would have amassed a total of Rs 5.17 lakh. On the other hand, an investor who put Rs 60,000 in the same fund at the end of the financial year would have amassed only Rs 4.62 lakh. The SIP investor made Rs 55,913 more than the lump-sum investor (see table).

Source: Ace MF, Value as on 31st March 2015, HDFC TaxSaver(G)5. Continue your SIP for the Long TermPeople tend to invest when the market surges and stop when the market plunges but this practice defeats the basic purpose of investing through an SIP. Staying invested over the complete market cycle enables you to even out the market volatility and allows you to take advantage of lower prices. So you should hold the mutual fund for at least 5 years till the market cycle is complete in order to benefit from the SIP.The example below will explain how Mutual fund SIPs can give good returns over the long term.
Source: Ace MF, Reliance Growth Fund (G), SIP amount Rs.10,000 per monthA real life example will drive home the benefit of continuing with SIPs when the market dips. Say, in the go-go days of January 2008, you started investing Rs 10,000 each month in Reliance Growth Fund, one of the top-rated equity funds. Even when the bears ran amok in late 2008 and early 2009, as the global financial crisis hit, you gritted your teeth, continued the SIP, and kept investing through market ups and downs till January 2015. Your perseverance and patience would have paid off handsomely. The amount of Rs.9,20,000 invested over the years would be worth more than Rs.17.32 lakh today, giving you an annualized return of 16.12%.But what if you, unnerved by sharp market falls, stopped your SIP in December 2011 and also withdrew your entire investment in the same month. Your total investment of Rs.4,80,000, in this case, would be worth about Rs.5.36 lakh then — translating into an annualized return of 5.84% only. It would have been much better if you had only stopped the SIP and kept the money invested till today. In that case your total investment of Rs.4,80,000 would be worth about Rs.10.64 lakh today — translating into an annualized return of 14.72%.Hence, it makes sense to invest in equity mutual funds through the disciplined SIP way and continue with them even when the market mood sours. This will help you to build a significant wealth in the long run, which will be useful to fulfill various goals in life.