Systematic investment plans (SIPs) are the go-to mode of investing for most mutual fund investors. In August 2023, the total number of mutual fund SIP accounts stood at a whopping 6.97 cores. On one hand, 35.92 lakh new SIPs were registered, while on the other hand, 19.59 lakh existing SIPs were discontinued (including those with tenure completion).
The number of SIP closures has been moving higher every month for the last few months. In April 2023 (at the start of the financial year), the monthly SIP closures were at 13.21 lakhs.
Let us understand how you can continue your SIPs for a longer period and make the most of them.
1) Start your SIP early, as soon as you start earning
Ideally, you should start investing as soon as you start earning. It gives your mutual fund SIP enough time to benefit from the power of compounding in the long term. With a longer time horizon, you increase your probability of earning higher returns and accumulating a higher amount.
For example, Ajay started a monthly SIP of Rs. 10,000 at the age of 25 years. Ten years later, Vijay started a monthly SIP of Rs. 10,000 in the same mutual fund scheme at the age of 35 years. Both of them plan to invest for their retirement till the age of 60 years. They are expecting a return of 12% CAGR. Let us see how much they will accumulate.
Ajay with Rs. 10,000 for 35 years at 12% will have Rs. 6.43 crore
Vijay with Rs. 10,000 for 25 years at 12% will have Rs. 1.88 crores
The above table shows Ajay started investing ten years earlier than Vijay. As a result, Ajay’s corpus is more than 3 times that of Vijay. Usually, the longer your investment time horizon, the higher the corpus you will accumulate.
2) Map your SIPs to your financial goals
You should always map each of your SIPs to a specific financial goal. Various financial goals include building a child education fund or retirement fund, accumulating money for a home loan down payment, starting a business, etc.
When you map your SIPs to your financial goals, there will be no temptation to redeem them till the financial goal is achieved. It will make you a disciplined long-term investor.
3) Invest in a step-up SIP instead of a regular SIP
A step-up SIP gives you an option to increase your SIP amount annually. The annual increment can be a fixed amount or a percentage of the amount you start with. In line with an increment in your annual income, you can increase your SIP investment by 5-10% annually.
For example, Ajay and Vijay started a monthly SIP of Rs. 10,000 in the same mutual fund scheme at the age of 25 years. Vijay opts for the step-up option (5% annual increment in SIP amount). Both of them plan to invest for their retirement till the age of 60 years. They are expecting a return of 12% CAGR. Let us see how much they will accumulate.
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As the above table shows, Vijay opts for a 5% annual increment in the monthly SIP amount. As a result, Vijay’s corpus is bigger than Ajay’s by more than Rs. 2 crores.
4) Never skip any SIP by trying to time the market
During your investment journey, there will be phases when the market will rise a lot in a short period. There will also be phases when the market will crash suddenly. Some investors try to pre-empt such market moves and change their investment strategy accordingly. They pause or redeem their existing SIPs or start new SIPs. In short, they try to time the market, which is difficult. Sometimes, even the best of experts get the market timing wrong.
Hence, you should never skip any SIP by trying to time the market. In the long run, an SIP gives you the benefit of Rupee Cost Averaging (RCA). When the NAV of your mutual fund scheme goes down due to a fall in the market, you buy more units. When the NAV of your mutual fund scheme goes up due to a rise in the market, the overall value of your units goes up.
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Updated: 15 Oct 2023, 09:08 AM IST