SIP vs Step-up SIP: Get Higher Returns in Mutual Funds & ETFs

Understanding SIP and Its Challenges

When we hear the word SIP, the first thought that comes to mind is investing in mutual funds. SIPs are indeed a good investment option, but there is a common problem. Everyone does SIPs, but do they get good returns? The main question is whether everyone selects the right mutual fund because, without the right fund, good returns are hard to achieve.

The second challenge is even if you find the right mutual fund, how can you increase your returns? In today's discussion, we will explore how you can enhance your returns through SIP in mutual funds with practical calculations that are easy to connect with.

The Calculation Method

Let's understand how returns can be increased with a simple calculation. Suppose there is a fund with an NAV of Rs.10, and you start an SIP of Rs.5000. In the first month, you invest Rs.5000 at an NAV of Rs.10, which gives you 500 units.

In the second month, if the NAV increases to Rs.12, your Rs.5000 investment will get you 416 units. In the third month, if the NAV rises to Rs.13, you get 384 units. But in the fourth month, if the market falls and NAV returns to Rs.10, you get 500 units again.

This fluctuation is the beauty of SIP. When the NAV is high, you get fewer units, and when the market falls, you get more units. This is why people say, "buy more when the market falls" because you get more units, leading to higher returns when the market recovers.

Practical Example

Let's take a practical example. In the fifth month, if the NAV increases to Rs.14, you get 357 units. So, after five months, you have a total of 2157 units with a total investment of Rs.25000. The average buying price is Rs.11.59.

Now, if you sell these units at the current NAV of Rs.14, your profit will be Rs.5198. This can be scaled up by increasing the investment amount. For instance, if you had invested Rs.50000 instead of Rs.5000, the profit would be proportionally higher.

Step-up SIP: Changing the Game

Now, let's change the scenario. Instead of investing Rs.5000 every month, let's invest Rs.15000 in the fourth month when the NAV is Rs.10. This increases your total units to 3157, and the average buying price drops to Rs.11.08. The profit now jumps to Rs.9000, almost doubling the returns.

This simple change in strategy significantly enhances your returns. The key is to invest more when the market falls, taking advantage of the lower NAV.

Overcoming Market Fears

You might wonder how to know when to invest more. Many people fear market falls, thinking it will drop further, and hence miss the opportunity to buy at lower prices. This fear is common, but in mutual funds, you don't need to worry much because fund managers manage the portfolio.

However, a safer and more secure way to invest is through index funds, specifically Nifty 50. This approach eliminates fear and allows you to take advantage of market fluctuations.

Investing in Index Funds

Index funds, particularly Nifty 50, are a great way to invest. When the market falls, you can buy more units without worrying about individual stock performance. For example, Nippon India Index Fund has delivered consistent returns over the years.

The strategy is simple: invest more whenever the market falls by 5%, 3%, or even 2%, depending on your financial capacity. This method ensures better returns over the long term.

Maximizing Returns with Safe Investments

To summarize, investing in Nifty 50 index funds during market falls is a safe and effective way to increase returns. By following this strategy, you can build a robust portfolio with higher returns.

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