Certain precautions need to be kept in mind before investing in mutual funds SIPs
Plan (SIP) is one of the best ways to invest in mutual funds. In a SIP you invest a particular amount (which can be re-arranged in the future) each month over a particular time span. This regular investment can yield magnanimous results over a substantial period of time.
In addition, SIP inculcates a regular and disciplined approach towards both investing and wealth creation. Generally, the earlier you start a SIP, better the returns you reap. Moreover, SIPs can also help you mitigate the risk associated with mutual funds. The regular or periodic investment and the rupee-cost averaging allows you to tackle market fluctuations and generate good returns over the course of your investment horizon.
However, there are a few things that you need to keep in mind before investing in mutual funds through SIP. Some of these comprise the following:
1. Have a concrete financial objective in mind:
Usually, many investors start investing in mutual funds in order to save tax or just because they have some extra cash. However, mutual funds can do much more than that. Investing in them can help you achieve your coveted financial goals. You must thus fix a concrete objective before investing in SIP. Are you investing for your retirement or the higher education of your children? Such clear objectives not only give you a direction to follow, but also give you a certain idea about choosing the right fund and amount for investment.
2. Know the value of your financial objective:
Just having a list of goals or objectives is also not enough. You need to know what the actual value of that objective is in the present and how it will fare in the future. This gives you a clarity on setting up an order in which those objectives need to be fulfilled. In short, setting up priorities. For instance, if you are planning for the higher education of your children across the shores, then as per current standards, you need a minimum amount Rs. 30 lakh to achieve it. However, if your son or daughter is going to pursue his or her higher studies after five years, you need to consider the inflation factor and add that amount in your original amount. Considering that the inflation after five year will be 7.5%, you will need to generate a corpus of Rs. 44 lakh instead of 30. Thus, while investing, you need to set the target of 44 lac and choose a fund accordingly.
3. Give a timeline to your objectives:
You need to determine whether the objective you are investing for is a short-term, mid-term, or a long-term objective. A short-term goal has an investment horizon of a year or two. Mid-term goals can be covered in 3–5 years while long-term goals need a time frame of five years or more. Defining the time frame of your financial goals helps you to choose the right set of asset classes that will help you generate returns you have chalked out.
4. Choose your asset classes carefully:
As mentioned above, a set timeline can help you in choosing the right combination of asset classes. Financial experts often say that it is the asset allocation and not the individual fund selection that determines the returns an investor generates. It is always good to have a certain diversification of asset classes in your investment portfolio. This allows you to generate stable returns even in the case of market fluctuations.
5. Choosing the right scheme for SIP:
There are several factors while choosing the right scheme for your SIP. You must consider factors such as past performance of the scheme and the fund manager, track record of the AMC among others. Additionally, consider investing in direct schemes instead of regular ones. Direct plans of mutual funds have a lower expense ratio and thus generate higher returns than the regular plan.
For example: Consider the following table, where you invest Rs 10,000 in both direct and regular plan. You can see the difference yourself.
6. Choose the bank and SIP date carefully:
Choosing the right bank and the perfect SIP date is essential, which is often neglected by many. After all the hard work and research, people often end up choosing a wrong date for their SIP debit and end up in defaults. This is because they failed to calculate the cycle of credit and debit in their bank accounts. You must choose the date for SIP date after you have certain regular income credit in your account. For instance, if your salary is credited on 1st day of each month, choose any date from 2nd to 28th for your SIP debit. It is advisable to have the SIP debit within the first week of the money credit.
Also, try to avoid giving bank details that hardly has any credits or sufficient bank balance. Transferring the SIP amount from one account to another can be tiresome and irregular at times. This may also result in default.
Opting for a monthly SIP is often the best form of investment that can help you yield substantial results. However, do remember to keep the above-mentioned points in mind before you take the plunge.
The author is the co-founder of Orowealth