Why Choose Mutual Fund SIP?

By Kavya Balaji | May 23, 2019

3 and 5-year returns from equity Mutual Funds have been in excess of 15% p.a., making SIPs popular. Have you invested in SIPs yet?

Why Choose Mutual Fund SIP

When the equity markets drop, people stop investing in Systematic Investment Plans (SIP) of Mutual Funds fearing losses. This is despite the fact that many financial experts advise against it as it would be counter-productive in the long run. However, in the recent past, people have been waking up to the advantages of staying invested.

People Love Mutual Funds

According to news reports, the data from Computer Age Management Services (CAMS) shows that Mutual Funds in India saw Rs.8,238.28 crores of inflows through SIPs in April 2019. This is 2.27 per cent more than the previous month where the inflow was Rs. 8,055 crores. The inflows stood at Rs. 6,690 crores in April last year. This is despite the Nifty 50 index being extremely volatile this year.

Additional Reading: AskBB – Investing In FDs And Mutual Funds

However, the average ticket size of a SIP has shown a marginal drop, indicating that people are investing less when the markets are sliding. The average SIP amount being invested has gone down from Rs. 3,3450 to Rs. 3,150.

The Highs And Lows

The most surprising fact is that even though the markets haven’t performed very well in the past year, SIP folios stood at 2.62 crores in March this year as compared with 2.11 crore in the same month last year. This clearly shows that Indian investors are willing to invest a fixed sum regularly irrespective of whether the net asset value or market level is high or low. The Year To Date (YTD) return of Nifty is about 7.94%.

The way SIPs are registered seems to have played a role too. Years back, SIPs were registered through the Electronic Clearing Services (ECS) method which took about a month. Now it is being done using the National Automated Clearing House (NACH). It has brought down the registration time to about 20 days. Note that CAMS data covers about 60% of the Mutual Fund industry.

Additional Reading: Best Equity Mutual Funds To Buy In 2019

Why Are People Rushing To SIPs?

There are three reasons why investors might be looking at the equity market:

  • Interest rates have fallen – As you might know, interest rates have fallen across the board. This includes bank Fixed Deposits (FD) and small savings schemes of post offices. So, investors are looking at alternative investments that give better returns. Also, there is the affordability factor. You can start an SIP in Mutual Funds for as low as Rs.100 and this can be done daily, weekly, monthly or quarterly.
  • Past returns seem lucrative – If you look at the two-year return from the Nifty 50, it is an amazing 24.16% per annum. The Sensex has returned 27.73% during the same period. The three-year returns are even better. While the Nifty 50 has returned 51.17% per annum in the last 3 years, the Sensex has given an astounding 54.33%. Investors are hoping that the markets would replicate such returns in the coming years too.
  • Higher awareness – With Mutual Fund houses conducting awareness campaigns with several Tier II and Tier III cities, financial awareness about SIPs seems to have gone up. People seem to better understand the concept of SIP and why continuous investment is important for good returns in the long term. They also understand that rupee cost averaging is the best way to lower the costs of investing in Mutual Funds.

Additional Reading: Equity Mutual Funds Investor? Here’s How You Can Download LTCG Statement

A Good Way To Save

Your investments need to be goal based and if they are, you will know the exact timeline for encashing the investment. You can plan for such investments using SIPs. Consider this – If you need Rs.5,00,000 in 10 years, you would need to invest Rs.2,200 if the equity markets are returning 12% per annum and just about Rs.1,700 if you get 15% per annum.

Want to know how much a particular investment would be worth after a specified period? Here’s an example.  Rs.5,000 invested per month would have become Rs.49.46 lakh in 20 years, Rs. 24.97 lakh in 15 years and Rs.11.5 lakh in 10 years (if the markets return 12% per annum). So, the longer you stay invested in equities, the better the lump-sum that gets accumulated.

Want to do your own calculations? Use our SIP Calculator.

For the best results from SIPs, there are three things you need to follow:

  • Make it goal based
  • Invest for the long term (minimum of 3 years)
  • Do not stop investing during market downturns
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