Mutual Funds Systematic Investment Plan (SIP) is a great way to start investment in mutual funds. It offers you to invest a fixed/pre-determined sum of money on a regular basis (monthly, quarterly) in mutual fund schemes. Some features of SIP like Rupee cost averaging, regular savings, compounding returns makes it a very attractive option of investment.
However, there are certain things which every investor should know and understand before taking the first step. Below is my attempt to cover some of important points to make that decision.
Goal Based Investing:
Investing without goal is like a construction without base. Do not invest your money on anyone else’s recommendations or only because your friend/colleague is investing. Invest with specific goals or objectives in mind. Setting up goals can help you make a proper plan with all the details like time horizon, amount required to invest, risk capacity etc. It will also help you in choosing suitable scheme.
When it comes to selecting the scheme, many investors often get confused and end up investing in the scheme which is recommended or listed with tags like “best Performing, Star rated Fund, proven past records” etc. Investors should understand that these are not the ONLY criteria’s for selecting a right scheme. Also, it’s not about “best scheme” to invest but it’s about selecting a scheme which is best suitable to your goals, risk capacity, duration and other needs.
SIP is not an investment strategy:
SIP is a way that helps you save regularly and accrue money to reach your investment goal. It is not a strategy to gain high returns.
SIP works best for long term:
SIP is recommended generally for long term as compounding works better when duration of investment is longer. However, that doesn’t mean that you should be invested for “long duration”. Monitoring your funds, its performances and making necessary changes when required is also very important.
SIP is not a way to reduce market risk and loss:
As mentioned earlier SIP is a way to invest in mutual funds i.e. indirect investment in stock market. Therefore, the risk of market volatility is inherent and chances of loss is also inevitable. But when you investing through SIP, you are lowering the risk of your investment over a period of time.
SIP is not always suitable for all types of mutual funds:
Mutual funds investment is subject to market risk and hence investing for long term in equity market is always good. Doing SIP in equity funds is better due to market volatility but it is not always beneficial with Debt funds for short duration.
SIP in ELSS:
SIP in Equity Linked Savings Schemes (Tax-saving Scheme) gets little confusing due to its lock-in period. Income Tax regulations states that if you want tax exemptions, you should be invested in ELSS schemes for at-least 3 years and the amount should remain invested for a minimum period without any withdrawals.
Therefore, when you invest in ELSS through SIP mode your each installment is treated as fresh investment and hence gets locked for 3 years.
Remember, your mutual fund portfolio should not consist of only SIPs but some lump sum investments too. Like I said before SIP is always not suitable to all types of mutual funds and for every goal.
Hope my points will help you make the right decision. Happy investing!