Systematic Investment Plans, popularly known as SIPs, have become a great way to invest in mutual funds. As an investor, you can save a pre-determined amount for a specific period in a scheme for a fixed day of the month.
Certain units are allotted for the sum you are investing in each instalment. Following are some factors that equity investors must bear in mind before choosing an appropriate SIP scheme in a mutual fund.
What is SIP?
SIP or Systematic Investment Plan is a methodical way to invest regularly in a specific mutual fund. Sometimes, you may not have a large sum of money for an investment. In those times, SIPs can play a major role in helping you save a substantial amount to plan your financial goals. Setting up a SIP with a mutual fund is an easy way to save where the fund company or bank will debit a monthly fixed sum. You can invest the amount of your choice in a mutual fund. Gradually, the investments accumulate and keep growing.
Benefits of SIPs
SIPs come with several benefits, such as:
Setting up and maintaining SIPs is simple. Additionally, the requirement permits a monthly automatic withdrawal of the investment amount from your bank account. As a result, you need not bother about investing manually. Because of this, SIPs are a practical choice for people who are too busy or don’t have the time to manage their assets actively.
With SIPs, you can select the investment amount, frequency, and term best suits your needs. This enables people to customise their investments to fit their unique financial requirements and ambitions. In India, all it takes to start a SIP is ₹500 per month.
Due to the modest investment amount and the extended time over which investment management costs are distributed, investing through SIPs is a cost-effective strategy. It minimises the impact of fees on total results.
7 Factors to Consider When Investing in an SIP
While SIPs can be a great way to start investment planning, it helps to know the various factors that can influence your decision.
Define Your Goal
Determine your objectives before embarking on your investment in this scheme, whether financing your education, acquiring a home, securing your retirement, or purchasing a sizable vehicle. By recognizing these aims, you’ll better understand the investment strategy that will align most effectively with your requirements.
Know Your Risk Appetite
Assess your capacity for risk-taking. Investment schemes can be categorized as low, moderate, or high risk based on the securities and asset classes they include. If you have a moderate risk tolerance, it’s advisable to consider investing in a balanced fund or a diversified large-cap equity fund. Investor preferences vary; some favour a conservative approach, while others lean towards a more aggressive strategy. Since equity investments involve inherent risks, this factor is of utmost importance.
Determine the Value of Investment Required
Your objectives will provide you with an estimate of the required funds, and you can assign a monetary value to the goal by referencing the item’s current cost. The next step is to determine its anticipated future cost, which is the item’s price in the year you intend to purchase. These two figures will help you calculate the instalment amount you need to contribute.
Invest Based on the Time Horizon
You can align your mutual fund investments with your specific investment timeline. For instance, if you have long-term financial objectives, consider investing in equity funds to work towards achieving them over an extended period. On the other hand, for short-term and medium-term financial goals, like purchasing a car, you might opt for debt funds. But remember that for enduring financial goals such as home buying or retirement planning, it’s advisable to invest in equity funds.
Choose Your Asset Classes Carefully
As previously stated, having a defined time frame can assist you in selecting the appropriate mix of asset classes. Many financial experts emphasize that the allocation of assets, rather than the selection of individual funds, primarily influences an investor’s returns. Maintaining a diversified array of asset classes within your investment portfolio is consistently recommended. This diversification helps you generate steady returns, even when the market experiences fluctuations.
Choosing the Right Scheme for SIP
When selecting the ideal SIP scheme, various factors come into play. These include assessing the scheme’s historical performance, the track record of the fund manager, and the overall reputation of the asset management company, among other considerations. Furthermore, it’s advisable to contemplate opting for direct schemes over regular ones. Direct mutual fund plans tend to have a lower expense ratio, leading to the potential for higher returns compared to their regular counterparts.
Market timing pertains to the optimal window when an investor can make the most of the stock market by acquiring more mutual fund units when the market is declining, and prices are lower. With SIP, you make investments consistently throughout the year, even during market ups and downs. As a result, SIP investments in mutual funds effectively smooth out the purchase price over time, potentially leading to improved returns.
With a clear understanding of your financial objectives and their present and future cost, calculate the SIP amount and choose a fund that aligns with your risk tolerance as you begin your wealth-building journey. It’s crucial to recognize that each goal represents a distinct path, and it’s best to avoid mixing one goal with another. Regularly assessing your future objectives and investment returns annually is a wise practice, and seeking guidance from a financial advisor is always beneficial.