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Sunday, September 3, 2023

HOW TO MAXIMIZE MUTUAL FUND RETURNS

 



In the last article, we compared SIP investment versus lumpsum investment and found out that in most cases SIP investment is a better option for long term investment. In this blog post, I would like to discuss the options available for increasing the probability of maximizing  returns in mutual fund investing.  To maximize  returns from mutual fund investment, the undermentioned Three Pronged approach is probably the better option:


1. SIP

2. Lumsump (switch from liquid or short term fund during falling markets)

3. Step up of SIP


Three Pronged Approach:


SIP. The investor should have a target of Terminal Value (TV) to be achieved in a particular period of time. Minimum ten percent of the terminal value should be accumulated within first 2-3 years of investing. So, if the terminal value in mind is Rs 2 Cr then 20 lakh must be accumulated within first 2-3 years through SIP and lumpsum both. The expected CAGR of 14-15% in the Equity Mutual Funds can double the money in approximately 5 years. The SIPs will take little longer, specially in early years, since the complete amount is not available for compounding. But once a base is made of substantial amount, the power of compounding kicks in, on the base amount and on the increasing amount of SIP every month.


Step Up the SIP every year by 10%. This enhances the power of compounding and helping the investor to increase the base amount on which compounding is happening.


Lumpsum.  During draw downs of the market or market crashes, top up the portfolio with lumpsum investment. This can be done if the amount is available in the bank account or one can maintain a certain    amount of money  in debt funds and use switching   option. Capital Gains will have to be considered before switching. You can take the advice   of your Mutual Fund Advisor to understand the tax implications on short    term and long term capital gains. But it will not be significant, considering the gains in equity. The lumpsum strategy can also be used to top up the  SIPs whenever you have extra cash available.


In the normal SIP approach, the mutual fund investment can double every 5 years, in long term (around 15 years) with an expected CAGR of 14-15%. With the above mentioned three pronged approach, mutual fund investments can double every 3-4 years with an expected CAGR of 14-15% in long term. The data shows that this has happened in the last forty years and if we believe in India’s growth story, the chances of this happening in the next forty years are very bright and better than before. 


Let's illustrate by an example: (normal SIP with Step Up)


SIP and Step Up Only:

Terminal Value (TV) to be achieved: 02 Cr

Time available : 20 years

SIP amount : Rs 10,000/- per month

Step up amount : Rs 1000/- per annum (I am not even considering 10% every year, which  keeps on increasing after first year)


TV after 5 years : Rs 10 lakhs

TV after 10 years: Rs 35 lakhs

TV after 15 years : Rs 89 lakhs

TV after 20 years : Rs 02 Cr


Look at the compounding, after first 05 years, it takes off parabolically. Once you make a base of some substantial amount, the power of compounding kicks in. Look at the parabolic growth. If the SIP amount and Step Up is doubled i.e. SIP amount is increased to Rs 20k per month and step up is Rs 2k per year, you will reach the target of Rs 4 Cr in 20 years. Tweaking of investment is in the hands of investor. Think of the target and start reverse calculation. One can always take the advice of Mutual Fund Distributor for better understanding. You should never be penny wise pound foolish.



This value can be as large as Rs 8 Cr, if you start with a base of Rs 20 lakh and start SIP of Rs 10k over this base and you keep increasing the step up amount by 20% of monthly installment every year and also invest lumpsum amount during markets draw downs. You can use SIP calculators freely available on internet (copy and paste the under mentioned links in the web browser).


https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php#google_vignette

https://www.advisorkhoj.com/tools-and-calculators/mutual-fund-sip-calculator-step-up


If you want to leave your legacy for future generations or start an SIP investment of your children at very early age, then  let me demonstrate the power of compounding for next 20 years for SIP amount of Rs 10k and step Up amount of 1k :


TV after 25 years : 04 Cr

TV after 30 years : 09 Cr

TV after 35 years : 18 Cr

TV after 40 years : 37 Cr


So, if an investor starts his investment journey at the age of 40, with an investment of mere ₹10,000/- per month, by the time time he retires at 60, he would accumulate almost Rs 02 crores. But if he starts his investment journey at the age of 20, he would accumulate almost Rs 37 crores at 60 years of age. He would create huge wealth for his retirement. Time is the most important factor in power of compounding. Even a small amount can create huge corpus, if invested for long time. The sooner one starts the better it is. 


Of course, every one doesn't have that much time left but you can always increase the SIP amount, step up amount and lumpsum amount to reach your realistic target in your time horizon. Mutual fund investment is not for regular income but for future wealth creation. But once the wealth is created, one can draw a healthy monthly income through SWP or STP (to debt funds) or intermittent withdrawal from equity mutual funds. Your Mutual Fund Advisor can help you in planning all your future expenditures, be it for retirement purposes or creating wealth for future generations.


Every Indian leaves some assets for future generations be it land, house, gold or cash. Nothing can be better than leaving your legacy of mutual fund investment for your future generations. You will ensure your future generations will never be poor because besides the huge wealth, they will also realize the power of compounding. 


REFERENCES: NIL


DISCLAIMER :   The opinion  expressed above  is our personal  opinion and  in no  way recommendation  of buying  or selling.  You must  consult  your  financial advisor   before making any fresh investment  in equity market. Please also note that  past   performance of funds does not guarantee future returns. 

We are also operating a Mutual Fund Distribution  Firm Investor First. For any kind of investments in Mutual Funds or Investment Planning for future targets, you can contact us at the following address :


Website: https://investorfirst.co.in/

Head Office : 2nd Floor, 159/129/96, Sri Krishna Tower, Near Hotel Ramada, Ballupur Road, Dehradun-248001, Uttarakhand.

Contact Numbers: +91-9164046333 (personal), +91-8410116967(off), +91-6397808084(off), +91-1353520386(off).

Mail Address: sangam157@gmail.com, info@investorfirst.co.in


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