A time-tested investment strategy that works well in the long term is Systematic Investment Plan. Let's look at seven factors you may want to consider when investing through SIPs.
What’s the right strategy for investing when markets are volatile? A time-tested investment strategy that works well in the long term is Systematic Investment Plan (SIP).You can systematically invest small amounts at regular intervals, be it weekly or monthly, in an SIP. It removes the potential mistakes one may commit, by timing the market. Besides, it ensures you stay on the right track for your long-term financial goals.
So, let’s look at seven factors you may want to consider when investing through SIPs.
1. Set a 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 goal – to be achieved within 3 years
Mid-term goal – to be achieved 3 to 5 years
Long-term goal – to be achieved after 5 years
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 time-frame.
2. Ascertain how much you want to invest: Typically, 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 intended goals, estimate the future cost of your goal, duration by which you plan to achieve 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.
3. Diversify investments according to your risk appetite: Your risk appetite or tolerance is the amount of risk you’re prepared to take, when investing in a specific asset-class. Every investor’s risk appetite is distinctly different and is typically influenced by several factors such as the disposable income, investment horizon, and, most importantly, age and immediate financial or 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. Top up your SIP contribution periodically: As your income grows, allocate a higher amount of your income as an SIP top-up. Doing so can help you reach your financial goals faster. Ensure that your contributions stay in line with inflation. Also, evaluate and find out if the top-up can be done in the existing SIP rather than initiate a new one.
5. Have a separate SIP for each goal: 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. Stop the SIP on reaching your specific goal: Once you reach your desired financial goal, you can stop or redeem your SIP and use the money to address the goal. Since various factors and circumstances may change during your SIP tenure, you may meet your financial goals much in advance. In that case, you can channelize this surplus to other goals.
7. Review the portfolio performance once in 3 or 4 years: 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 and to boost your portfolio returns.
Keeping the above points in mind, start investing systematically through Systematic Investment Plans and move closer to achieving your dreams.
(By Renjith RG, Associate Director at Geojit Financial Services)