A Systematic Investment Plan (SIP) is one of the easiest and best ways to invest in mutual funds (MFs). A SIP’s importance in investing for your future cannot be overstated. SIPs have the potential to earn inflation-beating market-linked returns through regular investments. It is also convenient to make your investments by issuing standing instructions to your bank to transfer the SIP amount at pre-decided intervals into your mutual fund account. However, when you, you should keep in mind the following five factors to make better investment decisions:
- Your investment objectives: Your investment objectives should assume paramount importance while making a SIP. Classify your investment objectives into long and short-term and invest accordingly. This will help you pick the right fund, whether for your retirement corpus or your child’s education, or any other reason.
- Arrive at a Rupee amount: When you are thinking about investing in the sip, think about your investments’ final worth. For example, if you plan to send your children abroad for studies and have earmarked Rs. 30 lakh for the purpose, inflation factor and add it to the amount. Assuming you need this amount after five years, and if we assume inflation at 6%, you will need to generate Rs. 40 lakh. With this target in mind, you need to pick a fund and make a SIP.
- Fund Returns and Expense Ratio: To get the best out of your SIP investments, you need to choose your fund carefully at the outset. This means comparing funds and their historical performances and looking at how funds perform across market cycles. While past performance may not be a parameter for judging the fund’s future performance, it gives investors some idea about the fund manager’s strategies in differing periods of market ups and downs. You should also look carefully at the expefund’s nse ratio of e higher this ratio, the lower your returns. For example, if the expense ratio is 1.5% and your fund returns 10%, the real return you will receive is about 8.5%.
- Pick the right asset classes: When picking an MF to start a SIP, you should pay attention to the primary asset class into which the fund invests. Equity is best suited for generating wealth and inflation-beating returns, while debt is best suited for wealth protection and regular income. Pick the asset classes that are best suited to your financial objectives and asset allocation strategy.
- Choose the SIP date wisely: Pay attention to the date you pick for the SIP. Ideally, it should be after you have received your salary/earned income each month. If your salary/income is credited into your bank account on the 1st of each month, then choose a date within the first week of the month after the 1st. Ensure your bank account has sufficient funds from which your SIP amount can be transferred into your mutual fund account. Avoid using a non-active bank account for your SIP investments.
If you have been wondering, you would be glad to know the process is simple; fill in the application form, submit post-dated cheques for monthly SIPs for offline mode or fill up the Electronic Clearing Service (ECS) form and provide your proof of identity, address and Know Your Customer (KYC) form. You can start a SIP online through the MF’s website and your internet banking or e-trading account. Alternatively, contact your MF distributor or financial advisor to help you set up a SIP.