What are average returns on SIP and how can you understand it?

Systematic Investment Plans (SIPs) have emerged as a popular investment method among retail investors, particularly those aiming to potentially build wealth over time through disciplined investing. With SIPs, investors contribute a fixed amount periodically to mutual funds. Over time, if the value of the underlying securities in their portfolio rises, investors earn returns.

The potential returns earned on SIP investments over a specified period can be referred to as average return on SIPs. Understanding how these returns can be calculated, how they are to be interpreted, and factors affecting them is important for evaluating their effectiveness in working towards financial goals.

Table of contents

• What is the average return on SIPs?
• Factors impacting the average return on SIPs
• Strategies for optimising SIP returns

What is the average return on SIPs?

The average returns on SIP are the profits or losses generated from investments made through a SIP over a period. They provide an overall view of how much an investor has earned or lost on their SIP contributions over that tenure. Depending on the calculation method used, SIP returns can be expressed in terms of:

• Absolute return: It measures the total gain or loss over the investment tenure.
• Compounded annualised growth rate: It shows the year-to-year growth during that period, assuming returns were reinvested.
• XIRR (extended internal rate of return): It is the preferred method for calculating SIP returns since it accounts for multiple cash flows at different times.

Factors such as market trends, fund types, investment duration, and economic conditions affect the SIP average return in India. Investors can find past return data through multiple sources, including through the website of the Association of Mutual Funds in India and individual asset management companies. They can evaluate returns over multiple horizons – starting from one year to 10 years or since the scheme’s inception. Looking at returns over longer horizons can give a better picture of the investment’s performance over time and across different market conditions. While average return data can help you assess a fund or fund category’s potential performance, it is essential to always remember that past performance may not sustain in the future. So, this information should be used as a reference point or a way to assess how your investments are doing, but not as a guarantor of future investment value.

Factors impacting the average return on SIPs

Here are 5 main factors that influence the SIP average interest rate:

• Market performance: The average return on SIP in India returns depends heavily on the performance of the underlying mutual fund scheme, which is influenced by market trends. Bullish markets typically enhance returns, while bearish phases may result in reduced or negative gains.
• Fund type and investment tenure: In general, equity funds offer a higher potential for returns over time, but at a higher risk level, as compared to debt or hybrid funds. A longer investment horizon is better suited for SIPs since extended durations help mitigate the impact of market volatility and enhance the potential for compounded growth.
• Rupee cost averaging: By making fixed investments irrespective of the market condition, you purchase more units during market dips and fewer units during market peaks. This helps reduce the average cost per unit in the long term and thereby can optimise SIP returns over time.
• Global factors: We live in a world where the economy of one country is indirectly linked to the economies of other countries. Therefore, changes in macro-economic conditions, inflation, and geopolitical events can influence SIP returns, especially for equity funds.

Strategies for optimising SIP returns

As mentioned, SIP returns depend on market conditions and other factors, therefore they cannot be predicted or controlled. However, investors can use certain strategies to optimise their SIP return potential.

• Stay invested for the long term: Avoid making impulsive decisions and withdraw or stop your SIPs during market downturns. A longer investment horizon gives your investment time to ride out volatility and enhance return potential over time.
• Leverage market corrections: You can increase SIP amounts temporarily during market corrections. This allows you to buy more units at lower prices, which can potentially boost overall SIP returns if the market recovers adequately.
• Step-up SIPs: One way to enhance your SIP strategy and potentially enhance returns is to gradually increase your SIP contributions as your income grows. This helps you invest more and therefore, potentially earn better long-term returns.

In conclusion, SIPs can be a suitable tool for disciplined investing and potential wealth creation over the long term. The average return on SIPs depends on a myriad of factors, including market conditions, fund selection, and investment tenure. By understanding these factors and employing effective strategies like diversification, commitment, and periodic reviews, investors can maximise their SIP returns and achieve their financial aspirations.

FAQs:

What is the minimum amount I need to invest in a SIP?

The minimum amount depends on the mutual fund company and scheme chosen. Many schemes allow you to start with an SIP of Rs. 500.

How often should I invest in a SIP?

There are many SIP investment frequencies available – daily, weekly, monthly, quarterly, semi-annually, annually etc. The monthly SIP is among the more common ones, since it aligns with the salary cycle of many investors. However, investors can choose any interval that suits their income flow, expenses and investment priorities.

Can I stop my SIP investments at any time?

Yes, you can stop your SIP investments at any time by submitting a request to your mutual fund provider or through your investment platform.

Do SIPs carry any risks?

SIPs carry risks that are tied to the type of mutual fund you have chosen. Equity-based funds are subject to market volatility, while debt funds, though less risky than equities, face interest rate and credit risks, among others.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.