From the power of compounding to financial discipline, there are several reasons to start investing in mutual funds through SIPs. But just like any other investment option, there are a few critical things that you should check before starting. Five such vital considerations are discussed in this post.
SIP or Systematic Investment Plan is one of the best ways to begin your investment journey. The freedom to select any amount you want and invest the same in the fund of your choice makes it one of the easiest and most flexible investment options. Apart from this flexibility, SIP is also known for its power of compounding, cost averaging, and its ability to make you a disciplined investor.
But just like any other investment option, you should only invest in a SIP plan after checking a few essential things. Five such important things are-
- Your Investment Objective
Every investor has a different investment objective. It can be long-term wealth generation for you while someone else might be investing to save taxes. Fortunately, there are now mutual fund schemes to suit every goal. You can go with equity funds for wealth creation and ELSS funds to save taxes.
Similarly, there are many other types of schemes for different objectives. Select one that best suits your interests and goals.
- Consider Your Risk Appetite
Just like the investment objective, every investor also has a different risk appetite. It is essential to select a scheme which suits your risk profile. Generally, equity funds are known to be riskier as compared to debt funds.
So, try to understand the risks associated with different types of mutual funds to make the right selection.
- Selecting the Right SIP Amount
While you can start a SIP with just Rs. 500 in a fund of your choice, it is important to choose the SIP amount very carefully. It should be in line with your financial objective while also making sure that you can easily afford it every month.
For instance, a SIP of just Rs. 1,000 won’t be adequate if you are investing to save for purchasing a home ten years down the line. While it is entirely alright to start small if you cannot afford a higher amount, make sure that you increase the amount in future as and when possible to ensure that you can achieve your objective.
- When Can You Withdraw Your Money?
While mutual fund schemes allow you to withdraw your money anytime, the funds have a lock-in period. Withdraw your money before this lock-in period, and you’ll have to pay an exit load. For most funds, this lock-in period is of one year, but for ELSS funds, it is three years.
So, before starting a SIP, make sure that you can remain invested in the fund at least until this lock-in period is completed.
- Selecting the SIP Debit date
To invest in SIP investment plans, you’ll be required to instruct your bank to let the fund house debit the SIP amount on a fixed date every month. This date selection should also be made very carefully.
For instance, if you are a salaried professional who receives salary generally on the 1st of every month, you can select the SIP date as or after 2nd of every month. This will ensure that you can invest money every month. Also, try to keep at least one additional SIP amount in your bank account in case if your salary credit is delayed for some reason.
Invest Smart, Invest Right
SIP is one of the best ways to achieve all your short and long-term financial objectives. With funds available for every objective and risk profile, every investor can benefit from this disciplined investment approach. Consider the things discussed above before investing, and you can avoid a host of common pitfalls that new investors generally struggle with.