Invest and maximize your Mutual fund returns SIP by SIP

Having made the decision to invest; now the one more important step is the way you invest or the investment mode. What are the invest modes available and how it can help you maximize returns.

Mr.Ashok too heard about many investment modes practiced by his friends and seniors at office but he could not understand which one is better and why. Let us help Ashok to select the best investment mode from the below:

1. One time investment on any day without timing the market

2. Irregular investment by timing the market

3. Systematic Investment on pre-defined date.

Assume if Mr.Ashok had invested Rs.90,000 in tax saving mutual fund for financial year 2006-07. Let us evaluate his investment portfolio against each option taking past 3 year’s performance of the Canara Robeco Equity Tax saving fund.

Note: This article discusses usage of SIP mode on a tax saving mutual fund but it is applicable to any mutual fund.

Option 1: One time investment on any day without timing the market

Most of the investors who just want to invest for the sake of getting tax exemptions or those who want to invest some large amount one time and forget about it comes under this section.

Amount invested	Investment date	NAV on April 5, 2006	Units Allotted
Rs.90,000	April 5, 2006	12.121	7425.129

One time investment does not take market fluctuation benefits.

Option 2: Irregular investment by timing the market

These are the section of investors who feel they can time the market and fetch more units when NAV is going down.

Amount invested	Investment date	NAV	Units Allotted
Rs 22,500	April 5, 2006	12.121	1,856.28
Rs 22,500	August 20, 2006	10.514	2,140.00
Rs 22,500	December 5, 2006	13.31	1,690.46
Rs 22,500	February 5, 2007	13.985	1,608.87
TOTAL Units			7295.61

1. Timing the market is difficult. Over 30 years of data (considering international mutual funds also) 75% to 80% of the fund managers cannot beat index in long term.

2. The reason why investors opt for mutual funds over direct trading is lack of time and knowledge in understanding the market. Fund managers are professionally trained and experienced who have access to more authentic market information than investors in quick time. Hence better to transfer your headache to fund managers.

3. Investor who kept on waiting to time the market finally forced to go for Option 1 at the end of the financial year and this could lead to hasty decisions.

Option 3: Systematic Investment on pre-defined date

SIP is the simple and time honored investment strategy for the long term accumulation of wealth. SIP method maximizes your profits and minimizes the risk compared to one time investor.

Note: SIP does not guarantee returns but it maximizes the returns compared to one time investor and minimizes the risk

Amount invested	Investment date	NAV	Units Allotted
7500	April 5, 2006	12.121	618.76
7500	May 5, 2006	12.796	586.12
7500	June 5, 2006	10.263	730.78
7500	July 5, 2006	10.084	743.75
7500	August 5, 2006	9.779	766.95
7500	September 5, 2006	10.866	690.23
7500	October 5, 2006	11.279	664.95
7500	November 5, 2006	12.623	594.15
7500	December 5, 2006	13.31	563.49
7500	January 5, 2007	13.298	563.99
7500	February 5, 2007	13.985	536.29
7500	March 5, 2007	12.067	621.53
TOTAL Units			7681

Advantages of SIP:

Power of compounding: The habit of investing a small sum of money in early age over a longer time would minimize the risk and makes money work with greater power of compounding with significant impact on wealth accumulation.

Rupee cost averaging: Timing the market consistency is a difficult task. Rupee cost averaging is an automatic market timing mechanism that eliminates the need to time one’s investments. Here one need not worry about where share prices or interest are headed as investment of a regular sum is done at regular intervals; with fewer units being bought in a declining market and more units in a rising market. Although SIP does not guarantee profit, it can go a long way in minimizing the effects of investing in volatile markets.

Convenience: SIP can be operated by simply providing post dated cheques with the completed enrollment form or give ECS instructions. The cheques can be banked on the specified dates and the units credited into the investor’s account.

Portfolio diversification:

1. Instead of investing Rs 7500 every month, investor can invest Rs 3750 on 5^th and Rs 3750 on 20^th.

2. Instead of only one fund, Rs 3750 can be invested in one fund and Rs 3750 in another one with different date intervals (5^th and 20^th)

3. Opting different fund house/managers could result in different investment methodology, sectors focused.

Do you know? If Rs. 3750 was invested two times a month on 5th and 20th for 12 months; your total accumulated units would be 7,763.64. Just try this out!!!

Now at last, your fund returns for the different investment mode over a period of 3.8 years when NAV was 21.32 as on Feb 23, 2010

	Total Units	Average NAV	Market value	CAGR (%)
Option 1	7425.129	12.121	Rs 1,58,303	15.88
Option 2	7295.61	12.482	Rs 1,55,542	14.99
Option 3	7681	11.872	Rs 1,63,758	16.5%

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