8 Factors to Consider When Opting for SIPs
By Akhil Chugh
Date March 31, 2024
To build wealth, simply saving money in a bank account or fixed deposits isn’t enough. To grow your wealth effectively, it’s essential to invest in instruments that offer returns beating inflation, such as mutual funds.
For investors who prefer lower risk, starting a Systematic Investment Plan (SIP) is a wise choice. SIPs instill financial discipline and regularity in investment, harnessing the benefits of rupee cost averaging and compounding over the long term.
A SIP involves investing a fixed amount into a mutual fund scheme at regular intervals, be it daily, weekly, monthly, quarterly, or half-yearly. This automated process deducts the predetermined amount from your bank account and invests it into chosen mutual fund schemes on a specified date each month.
Now, let’s explore eight essential factors to consider when investing through SIPs in mutual funds.
8 Factors to Consider When Investing Through SIPs:
1. Defining time-frame for your financial goals:
When planning for your financial goals, adopt a systematic approach. Categorise your SIP investments based on time-frames such as:
Short-term goals: Goals with tenure of less than 3 years like international travel, buying a car
Medium-term goal: Goals with tenure of 3-5 years like buying a house
Long-term goals: Goals with tenure of more than 5 years like child education planning, retirement planning.
Setting a deadline for your financial goals can help you to choose the right mix of asset allocation and the SIP amount you need to reach the target within the desired time frame.
2. Determine the amount to invest:
Usually, most mutual fund schemes via SIP allow you to invest with a minimum of Rs 500. But to know your SIP amount needed for your financial goals, estimate the future cost of your goal based on the tenure of your goal and the probable returns you are expecting from the investments.
Understanding your cash flows, duration and expected returns can help you determine the right SIP amounts to start your investments to attain your financial goals.
3. Determine the risk-return trade off:
Your risk appetite is the amount of risk you’re prepared to take, when investing in a specific asset class. Every investor’s risk appetite is uniquely different and is influenced by several factors such as disposable income, investment horizon, and, most importantly, age and immediate financial needs.
If you are a young investor, you may have a higher risk appetite than investors in their middle or near-retirement age. Similarly, liabilities such as expenses, debts, number of dependents etc., can also influence your risk appetite. Understanding the kind of investor, you are and the amount of risk you can tolerate can help you pick the right mutual fund schemes & asset class to invest in. Besides, mutual funds offer a plethora of schemes with different risk profiles and investing in multiple funds can help spread the risk.
4. Topping up your SIP with rising income:
SIP Top-ups is an option available to SIP investors wherein they can automatically increase their SIP contributions in the fund they are already investing in. As investor’s income grow with time, they are more likely to have more sum available for investments. SIP Top-ups allow these investors to increase the investment amount periodically.
Top-up SIP can help your investments match your income, beat inflation and reach your goals sooner with lesser operational hassles. Thus, it helps you stay flexible and regular with your investments at the same time.
5. Goal-based SIPs:
SIPs work best when they are assigned to specific goals. Goals can be long term, medium term and short term. This helps you monitor your goals more effectively across milestones and take decisions on rebalancing if required.
You may have multiple objectives to accomplish, like saving for a vacation, paying for your child’s education, saving for retirement and so on. Having separate SIPs for every goal can help you gauge your investment smartly. Find the appropriate asset allocation that is suitable for a particular goal and look at investing in the correct category of mutual funds in line with your timeline.
6. Selecting the right fund:
Here are few pointers to select funds for your SIP.
- Look at the pedigree and the AUM of the fund. This gives you an assurance that the funds are here for the long term.
- Secondly, the fund management team cannot keep changing too often. That is a sign of an unstable investment philosophy.
- Past returns do matter. More than absolute returns, focus on the consistency of returns. Such funds are more predictable.
7. Asset Allocation:
Diversification is key to managing risk in investment portfolios. Analyze the asset allocation of SIPs to ensure they align with your diversification strategy. Opt for SIPs that spread investments across various asset classes to minimize risk and maximize potential returns.
8. Review & rebalance the portfolio regularly:
A periodic review and rebalancing of your SIP mutual fund portfolio are essential. Doing so once in three or four years would help to remove non-performers from your portfolio and to boost your portfolio returns.
Key Takeaways from Net Brokers:
- SIP is a time-tested investment strategy to create wealth in the long run for investors. SIP makes the market timing irrelevant and ensures you stay on the right track for your long-term financial goals.
- Do not expect returns in the short run. SIP can really make the power of compounding work in your favour in the long run. The longer your SIP sustains the more rupee cost averaging works in your favour to reduce your cost and enhance your returns.
- To ensure good returns and safety of your investments, it is essential to choose the right mutual fund. Contact the expert team of Net Brokers today to guide you in choosing the mutual fund aligned with your financial goal & risk appetite.
Keeping the above points in mind, start investing systematically through Systematic Investment Plans (SIPs) in mutual funds and move closer to achieving your dreams.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
Happy SIPs!