One of the simplest and most versatile investment options requires careful thought and selection before you start investing in it. This article explains draws a simple roadmap you can follow.
As a young investor, you have several future financial goals that you must match with the right investment vehicles. You have come across a wide range of them, from PPF to NPS (National Pension Scheme) and from SIPs to liquid funds. SIPs are a good option to start with.
What is an SIP?
An SIP or ‘Systematic Investment Plan’ is an investment option that allows investors to put in small amounts of money in a mutual fund of their choice. The money is usually invested monthly and may be as low as Rs 500, depending on the chosen fund. It purchases units of the mutual fund scheme at a fixed price every month.
Over time, the SIP builds a large corpus without overburdening the investor, since the invested amounts are small and periodic instead of a large one-time lump sum. Do note that you do not get tax rebates on SIP investments.
If you have never invested in an SIP, this is why you should:
It inculcates the discipline to save and invest money every month
Anyone with a regular income can invest in the SIP. It
Since the invested amount is as small or large as you prefer, you have complete flexibility to invest in the SIP the way you wish. This gives you greater control over your own resources before investing
It works on the principle of Rupee Cost Averaging. It helps the compound interest on the fund grow exponentially over the years. Simply put, it helps you buy more fund units when share prices are low, and less when they are high. This ensures regular growth of the fund in line with your investment aims
You can choose the investment interval – monthly, quarterly or otherwise
How to invest in a SIP
* Research the best SIPs in the market. You might not be fully versed with the workings of the SIP the way an investment expert would be, but it helps to do some research to find the best SIPs in India. An online search, blogs from reputed fund houses and other such material can give you helpful insights to find the best performing ones. You can use online SIP calculators to find the ones that work the best for your investment aims and budget.
* Decide how much money to set aside in the SIP. An SIP grows through the purchase of various units of the mutual fund scheme. The more money you periodically invest, the more units you can purchase. Besides, you must stay invested for a longer time frame to make the corpus grow to the desired level. Start by deciding how much money you can realistically invest in the SIP for the chosen frequency. You can invest as little as Rs 1,000 to Rs 2,000 per month depending on your outlook and projected investment growth. You can also invest in different SIPs at the same time – do use the SIP calculator for the mutual funds you choose before you sign up for each.
* Choose the best funds. Though there are no set rules for investing in SIPs, there are a few thumb rules you can go with. The fund you choose must have a large asset size of Rs 500 crore, and it must be in the market for at least five years (this helps you chart the fund growth). Go with a reputed fund house that can set up the investment for you.
* Aim to build a diversified portfolio instead of accumulating equity funds. Equity mutual funds are attractive to a lot of novice investors since they promise high returns if one stays invested for a long term. However, resist the temptation to invest exclusively in equity mutual fund schemes. As an investor, whatever the instruments you choose must contribute to a balanced portfolio. The right asset allocation is key to steady and expected growth – choose three or four equity mutual fund schemes and divert the rest of your money in debt mutual funds or balanced funds. Ask your investment advisor about the best multi-cap funds in India, and invest about 50% of your money in equities.
* Do not frequently shuffle between assets. Another mistake many investors make is to keep shuffling between different assets as per market trends. This might result in needless expense, because shifting between asset classes incurs certain fees. It also reduces the overall margin of profit you would gain by staying the course patiently. Do internalise the fact that the capital market experiences periodic profits and losses, so stay invested and keep on track as per your advisor’s inputs.