Learn How To Improve Or Maximize Your SIP Return?

Published On 11 February, 2024 . By Dhiren Vaghadiya

How To Analyze Stocks Portfolio Before Investing?

I always like to analyze companies and invest in their stocks. It is like a meditation for me which gives me peace of mind.

But I understand it's quite risky. Because I cannot beat the smart fund managers of mutual fund companies who offer consistently good returns for 5-10 years. That's why, along with investing in stocks, I started SIP in mutual funds for consistent returns, which proved beneficial for me.

However, after some time, I realized there are many strategies for achieving good returns in stock investing or trading. So there must be some techniques in SIP investing also. I Googled, watched YouTube videos, read articles, and thought myself.

By combining all these, I am going to tell the final recipe for maximizing SIP returns in this blog through 10 key points. I hope my efforts won't go in vain and you will benefit from this blog. And yes, I am an open-minded person, and all suggestions are heartily accepted.

10 Easy Ways To Maximize SIP Return In Mutual Fund

1. Start Early and Stay Consistent:

SIP is all about the magic of compounding, Right?

Compounding always works over the long term, so the sooner you start investing, the more you'll benefit from its magic. Moreover, it's essential to maintain consistency in investing because consistent investments push compounding to its highest potential. Therefore, start saving today and invest as early and consistently as possible.

And yes, please don't say that you can't save because expenses are too high. Investing can start with just ₹100 per month, which is nothing in today's context! So if saving just ₹100 a month is difficult for you, then please don't continue reading this blog because investing isn't for you.

2. Never Over Diversify:

Never put all your eggs in one basket!

We've heard a lot about the importance of diversification. But this statement doesn't apply during SIP (Systematic Investment Plan) in mutual funds. This is because a mutual fund itself is a diversified stock portfolio, and if you invest in multiple mutual funds, there will be overlap in many stocks.

Therefore, for SIP, choose mutual funds wisely and avoid investing in more than 3 funds. Over-diversification can significantly reduce the potential for high SIP returns.

3. Increase SIP Amount with Income Growth:

If you are a salaried person, then with time and experience, your salary will also grow. Therefore, if you are a smart investor, you will increase your SIP amount along with it. Because this is the most basic and easy way to maximize SIP returns. Secondly, this will ensure consistency in your savings.

Remember one thing, always measure returns or investment amounts in percentages. For example, if you decide to invest 10% of your salary, as your salary increases, you automatically increase your SIP amount. You don't need to put in any extra effort for this.

4. Always Choose Growth Plan:

Most people may not be aware that mutual funds come in two types of plans: the first is the Growth Plan and the second is the IDCW Plan (Income Distribution cum Capital Withdrawal).

In the IDCW plan, when the mutual fund earns dividends from stocks, the fund house distributes that dividend among the investors on a specific date. Whereas, in the growth plan, the dividend income is reinvested.

Therefore, due to automatic reinvestment, the Growth Plan is generally a better and more suitable option for most people. So always go with a growth plan mutual fund.

5. Check Expense Ratio:

Mutual funds hire fund managers and researchers to analyze stocks and pick the best-performing stocks to create a highest-performing stock bucket, aiming to provide high returns on our invested money.

For all these tasks, the mutual fund company has to pay salaries, which they recover from us through the expense ratio in mutual funds. Whenever we invest any amount, this charge is deducted first. It can significantly reduce our returns in the long run.

For Example, Imagine you invest ₹5000 per month for the next 10 years in one mutual fund that charges a 0.72% expense ratio. So, your total invested amount is ₹6,00,000, and, you'll have to pay a total charge of ₹60,238 in the end due to expense ratio, which is not a small amount.

But here, one thing to consider is that mutual funds with higher expense ratios often offer higher returns as well. Because they undergo continuous improvement and refinement, along with more frequent buying and selling based on market conditions. Therefore, it's also important to ensure that these companies don't incur unnecessary charges. They are just charging for their service.

6. Engage in Sector Rotation Strategies:

If you are investing in sector-focused mutual funds for SIP, then this strategy is for you. In this, you will need to track sectoral trends and allocate your SIP accordingly.

I think this is a bit challenging to understand, so let us learn it with an example. Suppose you have started SIP in a chemical sector-focused mutual fund. And you know that the results of all these companies always underperform in the last quarter, which leads to the overall return of the chemical sector turning negative.

So, by heavily investing in that particular cycle, you can get more units of the mutual fund by investing less money. This can significantly increase your returns.

7. Take Advantage of Bad Market Conditions:

This strategy of optimizing SIP returns is well explained by the quote: "Be fearful when others are greedy and be greedy only when others are fearful."

Some people stop their SIP during a bad market condition or market crash out of fear. This could be your biggest mistake in investing. With this mistake, you are preventing beautiful miracles like Rupee-cost averaging from happening.

Imagine how happy you feel when you buy a ₹500 shirt at ₹300 after bargaining. This is the same benefit you get from Rupee-cost averaging without bargaining, which you prevent by stopping SIP. So be smart and take advantage of bad market conditions.

8. Explore Alternative Investments:

Along with aggressiveness to boost SIP returns, defensiveness is also important. That's why, in addition to equities, invest in alternative asset classes such as gold, real estate investment trusts (REITs), infrastructure funds, commodities, and so on. These will help to protect your returns in adverse market conditions.

9. Choose Tax Saving Fund:

Did you know, that when your profit exceeds ₹1 lakh, you have to pay a 10% tax on the profit?

Imagine you did a SIP of ₹5000 per month for 15 years in a mutual fund that gave a 15% return. So your total return after 15 years will be approximately ₹3,384,315 and the invested amount will be ₹900,000.

This means a gain of ₹2,484,315. If you calculate 10% of that, you'll have to pay ₹2,48,431 in taxes. This results in a loss of more than ₹2 lakh for you.

So optimize your SIP investments for tax efficiency by strategically allocating assets across tax-saving and non-tax-saving investment options. Utilize tax-saving funds like Equity Linked Savings Schemes (ELSS) within your SIP portfolio to maximize tax benefits and higher returns.

Note: These types of funds have a minimum 3-month lock-in period which means you cannot withdraw your money before 3 years. Also If you invest through SIP, consider each installment as a separate investment with its lock-in period. So it is more suitable for one-time investment with large capital.

10. Utilize Derivatives for Hedging and Risk Management:

First of all, if you are new in the stock market then stay away from options and futures. Only choose this option if you have a good knowledge of the market because it involves considerable risk. With this option, you can still get positive returns in a negative market.

Let’s understand with this example, suppose you are doing SIP in an IT sector-specific mutual fund, and you know that the IT sector is going to decline by around 500 points in the next 3-4 months. So, you can buy a put option for 200 points below the current index level. In this case, when the IT sector index goes down by 200 points, your put options value will increase.

So now, even though you are experiencing a loss in a mutual fund, you are recovering through futures-options derivatives.

Now It's Your Turn

If you've read this blog completely, then congratulations, you've taken a step ahead of others. But hold on, until you put it into action, they won't be of any benefit, Right?

So if you haven't started SIP investing yet, then start now by remembering the first point. And if you've been in the stock market for quite some years, then apply all these points. Also, learn to invest in stocks yourself because this will not only give you profits but you will also become a better decision-maker and a strategic-minded person.

You May Also Like:

Dhiren Vaghadiya

About author

Dhiren Vaghadiya

Hello! I'm Dhiren, an avid investor who continuously find valuable stocks to invest in. I enjoy delving into stock finances and conducting fundamental research. I'm a self-learner, primarily using YouTube and Google to learn new things. Additionally, I love music, movies, dogs and nature's serenity. Blogging, SEO, investing and spirituality are my favorite subjects.