SIP investment plans are the most commonly used mutual fund plans when it comes to building long-term wealth for retirement.
Before we talk about 5 tips to accelerate your financial growth with SIPs, it is very important to understand clearly what an SIP really is.
SIP is just a “mechanism” to do your monthly recurring savings into mutual funds. But it is NOT the only mechanism and definitely not the best mechanism.
Think about it, you save a certain portion of your monthly salary and invest it every month through SIPs. This essentially means that your savings are used to buy mutual fund units on a particular date every month.
What you are simply doing is saving every month through SIPs. There are other better ways to invest in mutual funds every month.
But all of us are so ingrained with SIPs that we confuse monthly recurring investment with SIP investment plan.
For the rest of the blog, we will use monthly recurring investment and SIPs interchangeably. And by the end of the article, we will introduce a far better alternative to SIPs.
So, what are the 5 tips to turbo charge your SIP (monthly investment) returns?
#1. Opt for direct mutual funds
This is perhaps the simplest one to implement. Direct funds will straightway give a boost of 0.8%-1% (annually) to your returns.
If you don’t know what direct funds are, I recommend reading this – How to invest in mutual funds in India: A Beginner’s Guide.
Now let’s take a concrete example of how direct funds will help you make more money on your SIP investment plan.
Suppose you do an SIP for Rs 10,000 for 20 years in a “regular” equity mutual fund. After 20 years, your annualized return turns out to be 12%. If you would have chosen the “direct” version of the same fund, your annualized return would be roughly 13%.
What does this mean in terms of final corpus that you will have. Take a look at the table below:
Direct funds will result in higher annualized returns and hence a higher final corpus.
Simplest to implement and ensures you earn 1% higher returns over regular mutual funds.
#2. Start early with your SIP investment plan
This is very important. If you are looking to build a retirement corpus with your mutual fund investments, starting early is extremely important.
The earlier you start, the more time you give your investments to compound. And compounding is simply awesome. You can’t imagine what it can do for your wealth creation.
Compounding basically means investing back the returns generated by an investment. This return generated is added back to the principal and then the investment generates further returns on the enhanced principal. This is a very powerful concept and can over time turn even small sums into very large sums of money.
Just to give you an example of how powerful compounding can be, let’s revisit the previous example of direct and regular funds. Let’s introduce 2 characters A and B.
Mr. A is smart and decides to invest in direct mutual funds in 2018. Mr. B, on the other hand, invests in regular mutual funds. Mr. B, however, starts 1 year earlier than Mr. A (in 2017).
Fast forward to 2038. Both A and B have just retired and plan to redeem their investments. Let’s see what each one will finally pocket home:
They both pocket roughly the same amount. Just imagine this – all it took was 1 year of extra compounding for Mr. B to overcome 20 years of earning 1% lower returns.
Now imagine what will happen if you start with your SIP investment plan as early as possible.
If you want to read more on this, do read our blog Starting early versus starting big.
#3. Select the best mutual funds for your SIP investment plan
This sounds almost like common sense. And it is. If you select the best mutual funds, you will get the best returns.
But the harsh truth is that most people get it wrong. They think that they are opting for the best mutual funds. But they are not.
If you are using star ratings on websites as the criteria for selecting your funds, you are doing it wrong.
What you need is a framework for selecting the best mutual funds.
A framework that takes care of the following:
- Captures the track record and consistency of performance of the funds over a long-enough time frame.
- Makes an apple-to-apple comparison – does not give any unfair advantage or disadvantage to any funds.
- Ascribes some weightage to recent performance of the funds.
- Looks at the right parameters (rolling returns) for evaluating performance.
- Segregates the funds into categories and compares funds within the categories and not across the categories.
- Risk & return performance of the fund should be in line with its category. You don’t want a multi-cap fund with risk and return characteristics of a large-cap fund. Believe me, this happens!
I will not talk about the framework in detail here. For those of you interested in knowing more, I have detailed out this framework here – Looking for the Best Mutual Funds to Invest? It’s a bit trickier than you think!
As per the framework, as of today, here is the list of best performing mutual funds across categories (as of now):
#4. Keep your portfolio optimized
The funds you select will not be the best funds forever. Make sure that you are always invested in the best mutual funds.
For example, suppose you select the best mutual funds as per the list above. Fast forward to year 2023. Do you think that the same funds will still be the best then? If not, why should you continue investing in them?
Portfolio optimization is fairly complex to implement. You have to actively manage your portfolio. Unless you have all the time in the world, better left for the machines.
#5. Apply intelligence
Best for the last!
By applying intelligence to your SIP investment plan (and now we will start to call it something different), you can give a significant boost to your returns.
Intelligence can be the real game changer for your investments.
5.1. What do I mean by applying intelligence?
Simple. Dig for historical patterns. Learn from those patterns and apply the learnings to your investing methodology.
5.2. What are these historical patterns?
Let me give you an example.
But before we look at the pattern, let’s just quickly introduce the concept of Price-to-Earnings ratio (P/E). PE is one of the most widely used metric to gauge market valuations (if the market is expensive or inexpensive or fairly valued). We will use the P/E levels of Nifty 50 index derived by dividing the Nifty value by the profit of its underlying stocks (on a per share basis).
What we will do is see how your returns would have turned out if you would have invested in NIFTY 50 index at different PE levels.
Look at the table below:
We will look at 1-year, 3-year, 5-year and 10-year returns. The data is compiled by using all trading days of NIFTY for last 20 years.
The way to understand this table is as follows:
Suppose you invested in NIFTY index on all days when PE was greater than 24 and held for 5 years. Then your average return would have been 2.5%. Also, there was an instance where you would have ended with a negative 1% return (worst case).
Similarly, suppose you invested at times when PE was between 14 to 17 and held on for 10 years, then on an average, your returns would have been 16.1% and the worst-case instance would have been 9.6%.
Now there is an unmissable pattern here.
As you move down the rows in the table, your return numbers (both average and minimum) keep getting worse. What does this mean?
Simple….if you enter the markets at higher PE levels, you are likely to end up with lower returns. And this is applicable for all holding periods. Just imagine this – if you invest in NIFTY at PE levels higher than 24, even for a holding period as long as 10 years, on average you would earn just 6.1%. That’s even worse than FD returns!
This is only one such pattern. If you dig deeper and dig properly, you will fund many such interesting patterns.
5.3 But how do you apply this to your investments?
In my view, it would be a criminal waste to simply ignore these patterns. They are telling us a lot and we should listen.
But our beloved SIP investment plan does exactly that – completely ignores them.
However, applying these patterns to your monthly investment plan (we are no longer calling it SIP) is pretty tricky.
Suppose you decide to incorporate the learning from the pattern above into your investing methodology. You know that lower PE levels are good time for entry and higher PE levels are just the opposite.
But how low is low and how high is high? And what “exactly” would you do with your monthly savings at different PE levels?
Unless you have a comprehensive set of rules (strategy) to apply, these learnings will turn out to be useless at best and maybe even dangerous.
5.4 Allow me to introduce AlphaSIP.
AlphaSIP is one such comprehensive set of rules, designed for recurring monthly investments.
AlphaSIP is driven by algorithms that have learnt from historical pattern and bring in a lot of intelligence to your monthly investments.
So, don’t SIP. Do AlphaSIP!