Four Things to Keep in Mind While Making SIP Investments

Mutual Fund SIP Investments are growing in popularity. The mutual fund industry has added close to 9 lakh SIP accounts in each of the eight months in FY2018. According to AMFI data, SIP contribution for the month of November 2017 stood at Rs. 5,893 crore as against Rs. 3,884 crore in November 2016, a growth of 52%.

Part of this growth has resulted from AMFI’s highly impactful “Mutual Funds Sahi Hai Campaign”, and some of it has resulted from plummeting returns from traditional investment instruments such as Fixed Deposits and Postal Schemes. More and more investors are looking at Mutual Fund SIP Investments as a way to achieve their future goals. If you’re recently started investing into Mutual Fund SIP’s, here are four important things for you to keep in mind.

They’re Not Risk Free

Widely misperceived as risk-free, your Mutual Fund SIP’s, in fact, can go down in value in the short to medium term. This is especially true for SIP’s made into equity oriented funds, as stock markets tend to be more volatile than bond markets. During heavily bearish marker phases, equity SIP investors must be ready and willing to see their capital go down in value temporarily. Over the long term, Rupee Cost Averaging greatly reduces the chances of capital erosion, but to minimize risks associated with SIP’s, investors need to run them consistently for at least five years.

SIP Returns may Not be Consistent

Investors who are used to the consistency and comfort of fixed return instruments may find themselves disappointed if they make Mutual Fund SIP investments with the expectation of similarly consistent returns. Returns from Mutual Fund SIP’s can go through phases when they are flat or even negative, and similarly, phases during which they deliver extraordinary returns. The longer you stay invested in Mutual Fund SIP’s, the more your returns are likely to be smoothed out.

Volatility Works for you in the Long Run

Investors who shy away from volatility should understand that fundamentally, SIP’s benefit from volatility, not from market growth per se. There have been extended market phases where point to point returns were flat, but Mutual Fund SIP returns were impressive. The key is to be dispassionate and not aim to time the market when it comes to SIP’s, as that can in fact lead to poor returns in the long term. The natural volatility that’s intrinsic to the markets will, in the long run, lead to impressive returns from your Mutual Fund SIP’s.

Your Time Horizon Should Dictate your Choice of Fund

As opposed to lump sum investments, where you should follow a well-defined asset allocation strategy basis your risk profile, Mutual Fund SIP investments should be made more or less purely based on the time horizon of your investments. For best results, link your SIP investments to goals or milestones in your life, and choose a fund that’s best aligned to that time horizon. For instance, stick to balanced funds for goals that are 3-5 years away, large cap funds for goals that are 5-7 years away, and more aggressive small and midcap funds for Mutual Fund SIP investments that are being made with a time horizon of more than 7 years.