Investing in equity mutual funds via SIPs seems like an easy, convenient, and smart way to realise your long-term goals. But can you be sure about this being the best path to achieving your financial goals?
Thus, it has the potential to generate higher returns over a period of time. But whether it will help you achieve your goals depends on various other factors as well. These are:
Let's look at each of these factors in detail...
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Choosing schemes sensibly
There is no denying the schemes you choose for your portfolio can make or break your financial goals, so these must align with your financial objective, risk profile, and investment horizon. This will enable you to decide which category, sub category, and/or style of funds you need to invest in.
If you ignore your personal needs and choose funds carelessly, you will invite undue risk that may lead you to deviate from your target. Therefore, select the schemes within a category by evaluating the consistency of the scheme's performance across market phases.
[Read: How To Check If A Mutual Fund Scheme Is A Consistent Performer Or Not]
Table: SIP performance of diversified equity schemes
|
(Returns in XIRR %) |
| Particulars |
1 Year |
3 Year |
5 Year |
|
|
|
|
| Best Fund |
22.18 |
16.88 |
14.80 |
| Worst Fund |
-33.05 |
-15.54 |
-7.71 |
|
|
|
|
| Average Diversified Equity Funds |
2.46 |
2.92 |
6.78 |
|
|
|
|
| S&P BSE 500 - TRI |
1.77 |
4.87 |
7.87 |
Data as on October 15, 2019
(Source: ACE MF)
Funds may underperform in the short run due to volatility in equity markets. However, if your fund is generating poor SIP returns even after a longer duration, say five years or more, then you may be stuck with an unworthy scheme.
As seen in the table above, there is a noticeable difference in the performance of the best and the worst performing scheme during 1-year, 3-year, and 5-year time frames. Some schemes perform well across bull and bear phases as compared to their benchmark and category peers and reward investors with superior risk-adjusted returns.
Therefore, select schemes that fare well on these parameters. Additionally, pay attention to the quality of the portfolio as well as efficiency of the fund house and the fund manager.
Further, to minimise risk and optimise returns diversify across the various categories, sub-categories, and investment styles keeping your personal asset allocation plan in mind. Conduct a periodic review of your portfolio to check if you are holding any non-performing schemes and whether there is a need to rebalance the portfolio.
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Investing the right amount
Though you may have selected a worthy scheme, you could still fall short of reaching your goal, if you do not invest an adequate amount.
Let's assume that you have invested Rs 5000 per month through SIP with a goal to achieve Rs 5 lakh in five years, with an expected annual return of 12%.
After five years, if your fund is able to deliver the expected returns, your corpus at the end of the period will be Rs 4.1 lakh, lagging your target by around Rs 90,000. For your desired amount of Rs 5 lakh, your SIP instalment amount should have been around Rs 6,100. This is precisely why investing the right amount is crucial to reaching your financial goal.
If you have invested a smaller amount towards your future goals, you need not worry. You may opt for the step-up SIP feature of mutual funds to increase your contribution by a fixed percentage or amount every year. This will enable you to accumulate a bigger corpus and beat inflation.
Ideally, you should step up your SIP contribution in line with the increments in your income.
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Following a disciplined approach
Often when markets turn volatile, investors tend to panic and rush to redeem the funds or stop investing altogether. What they fail to realise is that the benefits of SIP only works if you invest regularly in a disciplined manner over time without being bothered by market conditions.
[Read: Why You Should Not Stop Investing in Turbulent Times]
One of the major benefits of investing through SIP is that you need not time the market. Investing regularly allows you to purchase more units during market lows and fewer units during market rally.
This reduces your investment cost and at the same time helps you to tide over volatility. As a result, the path to your goal becomes less risky.
On the other hand, if you discontinue with your investments due to market noise, it can hinder your path to achieving your goals.
One must remember that equity investments take time to grow. In case of SIP investments, each instalment must be given adequate time to grow and generate meaningful returns. When you are nearing your goal horizon, gradually reduce your equity exposure to invest in a more stable and less risky investment avenue such as debt funds and Bank FDs.