Simple steps to follow to maximize the returns from Systematic Investment Plans (SIP) in Mutual Funds

Overview – System Investment Plan (SIP)
System Investment Plan (SIP) is the plan where investor makes equal investments at regular intervals into mutual funds on a specific date for a specific period. The biggest advantage is the averaging of the investments made where the market fluctuations are eliminated.

How does SIP runs ?
Investor makes equal investments at regular intervals over a period of time (minimum 6 months).

For an example, investor invests Rs.10,000 in mutual funds  where the NAV (Net asset value) is Rs.100. He gets 100 units of mutual funds. Now once he purchases the mutual funds, the markets go down and the NAV value comes down to Rs.95. The current investment value would be Rs.9,500 (Rs.95 x 100 units).

However in case of SIP, say investor takes the SIP Rs.5,000 in mutual funds where NAV is Rs.100 on 1-Jun (recurring every month on 1st of the month). He gets 50 units of mutual funds. Now the market goes down by end of the month and NAV is Rs.95. On 1-Jul through SIP the investor again invests Rs.5,000, but now he gets 52.63 units (Rs.5,000 / 95). He got more units with same price. Hence over a period of time the fluctuations in market will get eliminated

How to maximize returns from SIP
Please see the below two scenarios on how an investor can maximize the returns. Invest your monthly savings at multiple dates in SIP and maximize your returns. Thought both the investors invested in same mutual funds

 

Scenario-1

SIP

Date of investment

NAV

Units purchased

10000

1-Jun-12

100

100

0

15-Jun-12

95

0

10000

1-Jul-12

98

102

0

15-Jul-12

101

0

10000

1-Aug-12

105

95

0

15-Aug-12

99

0

10000

1-Sep-12

104

96

0

15-Sep-12

108

0

10000

1-Oct-12

110

91

0

15-Oct-12

110

0

50,000

 

Total units

484

 

 

NAV at end of period

110

 

 

Market value

53,278

 

 

Actual investment

50,000

 

 

Profit

3,278

       

Scenario-2

SIP

Date of investment

NAV

Units purchased

5000

1-Jun-12

100

50

5000

15-Jun-12

95

53

5000

1-Jul-12

98

51

5000

15-Jul-12

101

50

5000

1-Aug-12

105

48

5000

15-Aug-12

99

51

5000

1-Sep-12

104

48

5000

15-Sep-12

108

46

5000

1-Oct-12

110

45

5000

15-Oct-12

110

45

50000

 

Total units

487

 

 

NAV at end of period

110

 

 

Market value

53,522

 

 

Actual investment

50,000

 

 

Profit

3,522

 If you observe Scenario no.2 gives more turns comparing to Scenario-1. Thought for a 5 months period the returns show only 10% more, how if you are investing higher amounts or investing for longer terms, just imagine how your returns would be higher.

Have you enjoyed this post. Please provide your valuable suggestions to improve future posts. If you are excited, share the link in Twitter/Facebook (copy URL from your current brower and pubilsh in your Facebook/twitter)


Suresh
Myinvestmentideas.com

One comment

  • Dipakkumarr

    Dear Mr Suresh,

    I have Rs 2.5 Lakh and I want to invest it in lumsum along with this I want to invest in SIP Rs 10,000 per month. I have Term plan with Aviva ( Rs 50 Lakh) and 1 Lakh Mediclaim Plicy from New India Insurance for me and my family. My annual earnings are Rs 3.5 Lakh.
    Kindly give your expert opnion on my investment

Leave a Reply

Your email address will not be published. Required fields are marked *