How your investment methodology effects your returns

Nikhil Desai
/ Categories: Trending, Mutual Fund

There are various investment methods by which one can invest in mutual funds. Mutual fund offers options of systematic investment plan (SIP) as well as lumpsum to the investors. Moreover, SIP option gives a privilege of investing monthly or quarterly too. Recently LIC and HDFC also launched the daily SIP option for its investors.

 

Being a mutual fund investor, one should know how the returns varies with the choice of these methods. Lumpsum investment is mode where a person invests a large sum at one time whereas SIP is a disciplined technique of investing, investors transfer predetermined sum at regular intervals in a mutual fund scheme under this option. It aids investors by averaging of the cost of purchase of mutual fund units over a long period.

 

In the monthly SIP option, investor invest the sum on monthly basis and in a daily SIP, everyday. SIP option reduce the market risk and therefore preferred by the investors. As per the market situation returns from these investment methods differs.

The returns and units differ with the choice of investment methodology as NAV for the fund changes daily as per the market dynamics which drives the purchase of number of units for the investors that is, if the NAV is less than the previous day or previous month, the number of units acquired will change accordingly, even if investment amount remains the same. Let's work this out with an example.

 

For instance, Mr. A invested Rs. 36,500 for a year and opted for a daily SIP of Rs. 100 from 1st Jan 2017, assuming the funds performance to be replica of its benchmark S&P BSE 500. After one year, he wish to exit from the scheme, so as per the daily NAV what will be its value of NAV according to number of units he holds. As per our data analysis, the value of investment will be Rs. 36,674.85 with a profit of Rs. 174.85 as on December 31, 2017.

                                           

Similarly, if Mr. A would have been opted for Monthly SIP or Quarterly SIP what will be his returns at the end of the year. See table below

                  

From the above table, we can see that returns from each type of SIP differs as well as number of units also with respect to its NAV. NAV is totally dependant upon the the performance of the fund and its benchmark. Going ahead, high risk investor can also opt for the lumpsum investment option which is a high risk high return kind of option. In the same case, if we consider the lumpsum investment of the same amount Rs. 36,500 the returns will be enlarged with the same NAV movement and similar aspect as of SIP’s.

                                     

So, investors should choose their investment method wisely as per their risk appetite and return expectation while investing. Here in the above example, we have considered the base NAV of Rs. 50 and funds performance as same as its benchmark in all the cases. Higher risk gives you more returns but won’t protect from market volatility. In an up-trending market, lumpsum investment is advisable as it is poised to earn higher returns. However, daily SIP is suitable for a risk averse investor as it will minimize the losses arising from market volatility in a down trending market.

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