Mutual funds are one of the best instruments to start your investment journey. You can either make a lumpsum investment or you choose a Systematic Investment Plan (SIP) and invest a small amount of money periodically. For the beginners or first-time investors, SIPs are the best option as they allow you to earn high returns at a lower investment risk. You can invest a fixed amount every week, month, quarter, or half-yearly for a definite tenure depending on your income and financial goals.
Apprehensive first-time investors often hesitate to park a large sum of money in mutual funds, but SIPs don’t require big amount for investment. You can start investing in mutual funds through SIPs with as low as Rs 500.
Carefully plan your investment by setting up your financial goals. Here are 5 tips to help you invest in SIPs for the first time.
Identify Your Investment Goals
You must have a goal both short term and long term to start your investment. Before you start an SIP, it is essential to identify the goal to achieve through this investment. This simple step will help you decide the amount you wish to invest and tenure along with your target corpus.
You may be having different financial goals such as buying a car, owing a house, child’s education, marriage etc., so one SIP may not be sufficient to achieve all your goals. Depending on the number of financial goals, you may invest in multiple SIPs to cater to each of these goals.
Beat Inflation With Investment Returns
One of the golden rules of the investment is to factor in inflation while investing.
While choosing an SIP, you must factor in the existing and future inflation. You may be investing now but your future goals may change and require higher amount of money to cater to your needs.
It is often seen people falling sort of funds despite multiple investment as they ignore inflation that reduces their returns on investment. It is advisable that you must set the corpus target for your financial goals considering the estimated inflation over the investment period and decide the SIP amount accordingly.
Choose The Investment Scheme Carefully
The market is full of options to invest in mutual funds. It can be equity fund, debt fund or hybrid fund etc. Depending on your risk appetite, return expectations, and tenure in hand for your financial goal, you may pick the appropriate mutual fund. For example, if your risk appetite is high and you expect a high return and have a long-term investment horizon, you may opt for an equity asset class. Investors with a lower risk appetite may invest in a debt fund. Investors with a moderate risk appetite, looking for average returns, may opt for a hybrid fund.
Besides, the selection of right scheme and mutual fund company is also very important. There are many mutual fund companies in the market offering different investment schemes. All schemes by a mutual fund company may not have a good potential to offer attractive returns. To select the right mutual fund company, you must compare them based on factors such as the company’s track record, cost of investment, past performance of the scheme, the capability of the fund manager to generate high returns, etc.
Diversify Your Investments
A good investment strategy is to diversify your investment. As also mentioned earlier, you must invest as per your risk appetite and return expectations. Factors such as age, financial responsibilities, investment tenure, income, liability, etc., influence the risk appetite of the investor. Diversification can help in lowering the risk. For diversification, you should spread the investment across different asset classes, schemes, and mutual fund companies.
It’s also important to maintain the appropriate level of diversification to ensure the required level of return. Over-diversification can reduce the return on investment whereas inadequate diversification may expose you to a greater risk.
Keep Checking Your SIP Investment
Investment does not mean you park your money in some products and forget about it. You must keep track of your investment performance at a regular interval.
At times your investment may not perform as expected. It could be due to the wrong selection of funds or the negative market condition. If you are regularly checking the performance of your funds, you can take appropriate measures to ensure that your investment continues to generate expected returns to help you achieve your financial goals on time. You may remove the non-performer and switch the investment to another fund that offers better return prospects and suits your risk appetite. An SIP allows the benefit of Rupee cost averaging in the long term. Hence, the longer you invest through SIPs, the better the chances to earn higher returns.
Invest consistently with a strict financial discipline and patience. You may stop an SIP after achieving one financial goal and divert the fund to a new SIP for another goal while considering your risk appetite and return expectations.
(The author is CEO, Bankbazaar.com)