How to Make Your SIP Investments Work for You
Fuelled by AMFI’s impactful “Mutual Funds Sahi Hai” campaign, Mutual Fund SIP’s have witnessed massive traction over the past few years. In fact, their monthly contribution has almost doubled in the last two years from Rs. 3,122 crores in April 2016 to Rs. 6,690 crores in April 2018. If you’re a Mutual Fund SIP investor, here are four ways to make them work for you.
Keep Them Running
As a thumb rule, SIP’s work best when you dispassionately keep them running despite the ups and downs of the markets. Through a mechanism called rupee-cost averaging, SIP’s neatly smoothen out the average purchase price of your units, thereby absorbing some of the risks associated with equity investing and reducing the overall standard deviation of your investment portfolio. It’s critical that you don’t try and time your SIP investments by stopping and starting them; much better to let the natural flow of the markets run their course instead.
Align Them to Your Goals
Aligning your Mutual Fund SIP investments to your future goals can have a massive positive impact on their long-term efficacy. For one, your choice of Mutual Fund Investment automatically gets aligned with your time horizon. Secondly, goal-based SIP investments tend to be stickier and more ‘solid’; since you’ll have an eye on the bigger prize, you’ll likely be a lot less inclined towards taking reactive investment decisions that you’ll regret later.
Be Prepared for Non-Linear Returns
A big part of Mutual Fund SIP investing success comes from your own mindset. Especially if you’re a migrator from traditional, linear return instruments such as fixed deposits, you may find the non-linear returns that Mutual Fund SIP’s generate a bit hard to digest. There will be times when your portfolio dashboard will show a return of 20% and other times when it’ll show -5%. If you start capitulating every time you see negative returns, and become overtly euphoric during high growth phases, chances are that you’ll not achieve a lot of success from your Mutual Fund SIP’s in the long run.
Look at Bearish Markets as Opportunities
Admittedly, bearish markets can be extremely discomforting and can throw even seasoned investors off balance. It’s definitely not easy to see your hard-earned savings slip into the red, but as a SIP investor, you need to be prepared for this. In fact, you should see bearish markets as opportunities forlong-termm wealth accumulation, as it is during these phases that the impact of rupee-cost averaging is most pronounced. Think about it – if your Mutual Fund’s NAV falls from 100 to 50, every SIP tranche of yours will buy twice the number of units of the fund. Over the long run, this can have an explosive impact on your annualised returns.