Do you want to stagger your investment in mutual funds? Are you looking for the discipline of regular investing? You may consider putting money in equity funds through the systematic investment plan or the SIP. It is a facility offered by AMCs where you invest fixed amounts regularly in mutual fund schemes. According to data from AMFI (Association of Mutual Funds in India), you have SIP inflows for March 2021 at a record Rs 8,641.20 crore. You have the Nifty going up by just 1.1% in March, while the Sensex rose by a mere 0.8%. Despite this slight rise in the stock market, investors are rushing to invest in equity funds through SIPs. Why are people suddenly going for it?
What is SIP?
You have a systematic investment plan, or SIP, as a mode of investing in mutual funds. It helps you invest fixed amounts periodically in a mutual fund. Moreover, it teaches discipline as you regularly invest in a mutual fund to attain your financial goals.
You can match a salary hike by investing in equity funds through the Step-up SIP. It is also called the top-up SIP, where you increase your SIP instalment by a predetermined percentage or amount at fixed intervals to match rising income and attain long-term financial goals.
Why are people suddenly going for SIPs?
You have many millennials turning to stock trading during the pandemic as active investor accounts rose to a record 10.4 million in 2020. Moreover, you would find new Demat accounts rising to an all-time high of 10.7 million from April 2020 to January 2021, as many people who faced salary cuts or lost jobs rushed to the stock market.
However, after the stock market bounced back following the economic recovery post lockdown, many investors seeking easy profits have run out of patience. You have investors who want to invest in equity funds for the long term, looking towards the systematic investment plan.
You will find investors looking to invest in equity funds through SIP to achieve long-term financial goals instead of worrying about the stock market’s daily movements. It means many investors who invested in stocks to diversify their portfolio struggled to handle the turbulent stock market daily. However, investors who found it hard to time the rising stock market eventually turned to SIPs to avoid timing the market.
You may decide to invest your money in a savings bank account or a bank fixed deposit. However, with inflation rising in recent times, you will struggle to earn an inflation-beating return. For instance, retail inflation measured by CPI (Consumer Price Index) rose to 5.5% in March.
You will find the average investor who seeks inflation-beating returns looking to invest in stocks. However, you have increased volatility in the stock market, persuading investors to put money in equity funds through SIP. It is a good move as investors who have run out of patience don’t have to wait for a stock market correction.
How to get good SIP returns?
You may consider these tips to increase equity funds returns if you invest through the systematic investment plan.
Opt for a longer SIP tenure
Studies have shown that investing in equity diversified mutual funds through SIP for the long term reduces the risk of losses. In simple terms, you must stick with your SIPs for the long run if you want inflation-beating returns from your investments. You will find the bear market generally lasting for one to two years in India. It helps if you have a longer time horizon of around five years as your investment through SIPs have the time to bounce back when bull markets return.
Extend the investment horizon if you start SIPs during a market peak
You may have started investing in equity funds through SIP during a stock market peak. It means you could suffer a loss if you exit your investment within one to two years. You don’t have to worry when you start SIPs if you invest in equity funds with a longer investment horizon of around ten years. It helps if you extend your investment horizon on starting SIPs during a stock market peak.
Select the right equity fund
You must select an equity fund that matches your risk profile and helps you attain financial goals. It would help if you checked the AMC’s track record and the fund manager’s investment style before investing your money in the equity fund.
You have a systematic investment plan as a way of investing in mutual funds. It would help if you picked equity funds that have outperformed the market index and peers over some time rather than focus on SIP dates.
If you choose a poorly performing equity fund, you may not earn inflation-beating returns even on extending the SIP tenure or staying with SIPs for the long run.
You may find SIP a convenient way of investing in equity funds as you don’t have to time the stock market. Moreover, the record SIP inflows in March 2021 mean investors may have realised the systematic investment plan’s potential. However, you may consider keeping a close watch on SIP inflows in the following months to check if the trend continues. In a nutshell, you must pick the right equity fund and continue SIPs for the long run to achieve your financial goals.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
