The Systematic Investment Plan or SIP route to mutual fund investors is an excellent way to become financially disciplined to achieve your long-term goals. The route allows investors to put in a fixed amount in a mutual fund scheme after every month or week or quarter or six months or year. But before you decided to choose this route for your investment, you need to have clarity about certain things about SIP and its benefits. This will help you choose the right SIP plan and minimize the risk involved.
Things to Know About SIP
- A Systematic Investment Plan can be started with an amount as low as Rs500-Rs1,000.
- It is an excellent way to inculcate financial discipline and investing regularly.
- The option offers investors the compounding benefit wherein the returns on your principal amount are reinvested to get more returns.
Let us look at some essential things that every investor should know before choosing the SIP option to invest in mutual funds:
- Identify Your Investment Goal – The most important question before opting for SIP is what exactly is your investment goal? Whether you want to buy a house or invest in a car or any other reason. And, what is its monetary value? Specify your investment goals in monetary terms so that you know how much funds you needed and at what time. You can use a mutual fund SIP calculator to find out how much you need to invest and for what period. The SIP amount and duration will vary according to the goal you wish to achieve.
- Whether Your Goal is Short-Term or Long-Term – You may be wanting to buy a new car in a couple of years or planning to send your child abroad in another ten years. Both these investment goals vary and so require different types of SIP investments. Short-term goals need to achieved in a year or two while medium-term goals may require an investment window of three to five years before they can be fulfilled. This can be achieved by investing in a combination of equity and debt funds. Goals such as retirement planning or child’s marriage are long-term and can be achieved by investing in equity funds.
- Choosing the Correct SIP Date is Important – Before you finalize your SIP date do check the date on which your salary and other income are credited. Choose a date on which you are sure your bank account will have the necessary funds and that there is no scope of a default.
- Finalize the SIP Amount That You Can Afford – Choose a SIP amount that you can easily shell out. Take stock of your financials- income, expenses, and savings before you decide on an amount that you can spare regularly. Unrealistic commitments can put you into trouble later and lead to default.
- Choosing the Best Scheme – Choosing the right scheme is important for the attainment of your goals. This is possible by comparing the various plans offering SIP, their previous track record, and the reputation of the asset management company offering them. A good track record of the mutual fund company and its fund managers is important.
Educate yourself and make the right investment decision.