What is a Systematic Investment Plan (SIP)?
A SIP is one of the best ways to invest in mutual funds. It allows you to put a pre-determined sum aside for a specific period of time on a fixed day each month. SIPs are perfect for people who want to invest small amounts over time, such as weekly or monthly, and choose the unit size – or a number of shares – for your allotted amount. When investing in mutual funds with SIPs, there’s no chance that you’ll make mistakes by trying too hard to time the market. Plus, it ensures you’re on the right track with your long-term financial goals, because you’re spreading out your investment over time instead of making one large purchase and forgetting about it.
How Do SIPs Work?
When you invest in a mutual fund scheme through a SIP, you are buying a specific number of fund units equal to your investment amount. A SIP is a perfect choice for investors who don’t have the time or inclination to trade and would rather take advantage of any opportunities that come their way, highs and lows..
Let’s take mutual funds as an example. The NAV of all mutual funds is updated daily – meaning the cost of purchase may change from one installment to another. Over time, the cost of purchase averages out and turns out to be on the lower side. This is known as rupee cost averaging. The benefit of rupee cost averaging is not available when you invest in a lump sum.
By making small monthly investments, you can accumulate sizable wealth over a long period of time. There are two types of earnings involved with mutual funds: dividends and capital gains. What many people don’t realize is that reinvesting your earnings instead of withdrawing them could be beneficial. This is because every month when you activate an SIP, a fixed amount is deducted from your bank account which gets invested in the mutual fund that best suits your objectives. And this helps instill financial discipline in the long term!
Although it’s easy to open a mutual fund account and commence an SIP investment these days, it’s important that you take the time to address certain factors before starting. Sit down with your family and figure out a contribution level that will work for everyone’s needs, consider your retirement goals, and decide on an investment strategy.
5 Things to Consider Before Starting a Systematic Investment Plan
1. Identify your goals
When you open a SIP, you will have to choose a goal. Once you’ve identified your dream, it will be easier to decide how much and how often you want to invest. You may want one SIP for saving for a vacation, or one for studying abroad with your child, there’s no limit to the number of SIPs that could work for you. Having separate funds for every goal helps you keep track of what’s going on with both your money and life goals.
Creating a plan – identify the goal you want to invest for and choose how long you have available, such as 1 year or 5 years. Figure out which asset allocation will allow the most growth and when to invest what type of funds. Contact us with your SIP and we’ll figure it all out for you!
If you start by paying a smaller monthly amount, rather than a large sum at one time, your monthly budget won’t be as strained. Your monthly bill will remain affordable and manageable for the long term.
2. Assess your risk profile
Investing in mutual funds comes with risks and rewards. Funds can be differentiated into risk categories depending on the securities and asset classes they invest in. To determine your degree of risk-reward preferences, it’s important to assess your risk tolerance. Investing more in a given asset class will expose you to a higher degree of risk. As such, make sure you’re investing in a scheme that matches your risk tolerance by reading over their prospectus or talking to them directly with any questions or concerns that you might have.
Investors have different risk appetites, which is determined by a variety of factors including discretionary income, investment horizon, and age. Similarly, liabilities can also play a role in determining your risk appetite.
As an investor, it’s important to understand your risk tolerance and the type of investor you are. Younger investors may have larger risk appetites than those near retirement or who are in retirement. A balanced fund or a responsibly-managed large-cap equity fund is a good choice for more conservative investors. Furthermore, mutual funds offer many different schemes with different levels of risk. Investing in multiple funds can help spread the risk.
3. Performance of the Mutual Fund scheme
Before investing in mutual funds, take time to assess the performance of a fund. Check the performance of a fund against the benchmark index over 1 year, 3 year, 5 year and since inception along with the consistency of the return.
To find the right scheme for your SIP investments, make sure it has a track record of performing well. The ideal fund will be diversified and outperform average or benchmark returns. When deciding on the right fund to invest in, take its manager’s track record into account as well.
4. Consider credentials of the fund house
An asset management company should have a good reputation in the market, and the fund manager should show a solid track record of managing funds if you want to choose the right one. Checking whether the fund house’s credentials are there, like how experienced its fund manager is, what assets are managed by the house, and how much capital has been put into your specific scheme, will help give you some indication of which direction to go. A long-standing process-driven fund company is likely to be reliable in terms of performance.
When you invest in new funds, it’s important to pick a fund house that has established itself in the industry and has proven itself to be trustworthy. Consider investing in funds managed by a well-established fund house and follow their robust investment process when deciding where to put your money.
5. Expense costs
Funds have expense ratios, entry and exit onto them, which should be taken into consideration when making a choice. The return, as well as the risk involved, is also important for you to consider. To learn about what’s offered by different funds, check the fund fact sheet, portfolio statements and performance tracking websites.
Investors should be mindful of the expense ratio for their mutual funds since those fees can have a significant impact on net profitability. The whole amount of fund fees is divided by the total value of its assets to get the expense ratio.
The expense ratio of the fund and the redemption loads are important factors to consider when choosing a mutual fund. The largest expense ratios fall between 1-2%, with some falling below 1%.
Last but not least, you need to understand your investment and how it works. Calculate the appropriate amount of investment that will help you achieve your financial goals by projecting future earnings on a timeline in which you imagine your money might grow. With technology, it’s just a few quick strokes to calculate an accurate SIP amount for yourself with various fintech apps, online portals of fund houses and more. It’s important to choose an appropriate date for the transaction, as well as link your SIPs with a bank account.
Now that you’re aware of some key factors to consider before investing in a SIP, choose a fund that matches your risk appetite. The journey to wealth creation starts today with an investment now- take the time to review your goals and your returns on a periodic basis. And as a result, make sure that your SIP investments are in a worthy mutual fund scheme.
Starting an SIP can be a great way to invest in your future, but it’s important to weigh the pros and cons before you make any decisions. We hope this article has helped you understand some of the key factors to consider before starting an SIP. As always, consult with a financial advisor to get tailored advice for your unique situation.