Investing in mutual fund equity schemes through systematic investment plans (SIPs) has yielded best returns for investors over a period of time. Buying equity scheme units through SIPs, which involves pre-determined periodic purchases of units over a period of time, every month in the past five years has fetched 10 per cent to 18 per cent annualised returns.
SIPs eliminate the human bias. It encourages investments at all times, irrespective of the market levels. Investors will pocket good gains if they invest in SIP of funds with a good track record.
For instance, if an investor puts Rs 1,000 every month in UTI Opportunities Fund, a star performer among all equity funds - (Rs 1,000 x 120 months = 1,20,000.), he would have been sitting on approximately Rs 2,78,657.00 today, which 15 per cent returns.
SIP investments average out market volatility by a good measure. Also, it prevents investors from trying to time the market. It enables small investments at regular intervals.
SIPs tend to do well even in times of market underperformance as the (fund) pool is deployed at most market levels, thereby averaging out unit purchases at all price points.
SIP portfolios must have gone through the dips - buying more stocks as prices declined. Volatility also helps SIP portfolios in a big way. Funds that have managed to withstand the market fall have delivered better SIP returns.
Investors get more units for the same amount of money in falling markets. The units bought at lower price levels will appreciate when the market turns around, adding to the overall portfolio value. The variance in the performance of SIP and lump-sum (or one-time) investments is mainly due to the fact that SIP investors would have picked up additional units during the downturn.