Three Tips To Maximize Your Equity Mutual Fund SIP Returns

Fuelled by far reaching investor awareness campaigns and digital initiatives to reach out to B-15 cities, mutual fund systematic investment plans (SIPs) have picked up pace at the rate of knots in recent times. An estimated 6 lakh new SIPs are being added by the industry each month – with a large chunk of them flowing into equity oriented mutual funds.

Despite their widespread popularity, a number of first time investors remain relatively unclear about the concept of SIPs. Some erroneously view it as a mechanism to generate short term returns by speculating in the equity markets, whereas still others falsely consider SIPs to be free of risk.

Regardless of whether you’re new to SIPs or a seasoned investor, here are three steps you can take to maximize your SIP returns and optimize your investing experience.

Embrace Volatility

Equity SIPs, by design, generate better long term returns in volatile markets. In other words, you really don’t need markets to be bullish in the long run for your SIPs to generate inflation beating returns for you. You do, however, require volatility – which all securities markets are bound to provide.

Take, for instance, a monthly SIP of Rs 10,000 started fatefully in the bellwether Franklin India Bluechip Fund at the peak of the bull market in 2008. Five years later, the Nifty would have delivered a point to point return of -5 per cent (absolute). Your SIP, however, would have grown at an impressive rate of 13 per cent CAGR. Here’s another interesting fact, though – a SIP in Franklin India Prima Fund, a higher volatility fund by the same AMC, would have delivered an even better 16.23 per cent CAGR in the same period.

Put simply – if you’ve got a long-term savings horizon spanning 7-10 years, it’s wiser to select higher volatility funds such as mid cap funds, simply because they will tend to fall deeper than broader indices, and rise higher than broader indices. This will maximize the “rupee cost averaging” benefit associated with your SIP. Additionally, it would be wise to steer clear or sectoral funds for your SIPs, as these funds could potentially go through extended troughs and crests, which would hamper your returns in the long run. A case in point – those who started SIPs in Pharma funds 12 months back are still sitting on negative returns a year later.

Make Time Your Friend

Equity oriented SIPs are meant for long term saving – if anybody has advised you otherwise, you’re better off ignoring it. Your SIPs will work for you only if you remain committed to them through the inevitable vicissitudes of the equity markets. In fact, the best time horizon for SIPs are two complete market cycles that could last anything from 8-10 years. If you’re thinking of getting into SIPs to ‘make a quick buck’ by riding a short-term market wave, you’re bound to come away disappointed. As a general rule, any goal that’s less than three years away should ideally see zero equity SIP allocation, whereas balanced funds may be considered for goals that are 3-5 years away.

Remain Passive

Passivity is strength when it comes to your SIPs. As markets rise and fall, you may cringe when one of your SIP tranches get debited at a seemingly ‘high’ point of the market and groan in frustration when market fall heavily a day or two after your monthly SIP gets debited – but fear not, it all gets averaged out in the long run. In fact, those who repeatedly try to time their investments by predicting market troughs suffer the most in the long run. Short term stock market trends are near impossible to predict, and you’re far better off allowing your SIPs to run their course dispassionately, even though extended periods of negative returns. Shut your eyes to the ups and downs of the markets, and you’ll be pleasantly surprised with the results a few years later.