Kolkata, November 13: Any financial advisor will recommend Systematic Investment Plans (SIPs) in mutual funds as a savings option. SIPs offer several benefits to the investor. We will look at its various benefits, some of the things to keep in mind while investing in an SIP and also how to track an SIP in order to get the most out of it.
Arun Kumar, Head of Research, FundsIndia, lays down the various benefits of SIPs.
Ideal for investors with small amounts to invest
SIP makes investing a lot easier since it does not strain one's finances. It is, therefore, an ideal investment option for small investors, who otherwise would not have been able to participate in the equity market.
Disciplined saving to achieve life goals
To achieve any objective, discipline is the key. Through SIPs, one commits to save regularly, and every investment takes you a step closer to reaching your financial objectives.
Rupee cost averaging
Markets are volatile in nature and it is next to impossible to time the investment. And by choosing to invest a fixed amount of money every month, one can enjoy the benefit of accumulating more units when the market is down and averaging out the cost of the investment.
Benefits of compounding
Investing a fixed amount on a regular basis will grow into a large amount through the power of compounding.
Even for a small investment amount, investing in mutual funds through SIP offers the benefit of diversification.
SIP is a hassle-free process. It can be step-up SIP by instructing one's bank to facilitate auto-debits on a convenient day of every month.
Things to keep in mind
Kumar says, “However, there are a few things an investor needs to keep in mind before investing in SIPs.” These are:
- Concrete financial objective
This could be directed towards saving taxes or children's education or owning a house.
- Value of the financial objective
One needs to know the actual value that is required to achieve the goal. This can be achieved by knowing the present value of the desired objective and how it will fare in the future by taking inflation or capital gains into consideration.
- Available duration
One should know the duration available for the objective.
“The above three factors help investors to arrive at the risk nature and asset class, required return percentage and SIP amount. Once the right scheme is selected, investors should choose the bank and SIP date carefully,” he adds.
Manage all investments from a single account
When an investor has multiple objectives, then he or she ends up investing in multiple schemes from different fund houses. The investors may not be aware of this when they start investing for the first time but start adding new funds over a period of time.
“Thus, it is always important to begin one's investment from a common platform through a single account to avoid the hassle of managing through multiple accounts. Managing all investments in a single place also helps investors to better track, monitor and compare the performance of different schemes in the portfolio,” says Kumar.
Track performance regularly
While tracking SIP performance, investors should stay focussed on their goals and not be disturbed by market volatility. Typically, one year is a short time to judge any scheme and the returns it has given. Investors should at least look at three to five years’ timeline for better analysis of a scheme or portfolio.
A temporary decline in the market is not a reason for investors to discontinue or stop their SIPs. Historically, we have seen market recovers itself whenever there is a fall. So, one should see this as an opportunity to add higher number of units. And when the market starts to go up, one who has invested during the market correction will have higher investment value for the same investment amount, compared to an investor who did not invest.
We reiterate the fact that investors should stay focussed on their goals and not be disturbed by market volatility.
Plan your SIP properly
It is always advised to classify one’s investment based on objectives, as every objective will have a different investment time duration, final value, return expectations, risk nature and suitable asset class. Thus, by having a clear definition for each objective, the investment tenure and SIP amount can be decided.
For example, let’s say an investor has a 5-year-old child and objective is to save for the child’s college education. This gives the investor a 12-year timeline to start the SIP.