SIP investing is the most popular way of investing in mutual funds. It is suitable for almost all types of investors. Individuals who seek to get equity exposure and want to invest for the long term can choose the SIP mode of investing. Furthermore, SIP helps in averaging out the market volatility when investing across different market cycles. And, when done for the long term, you can benefit from the power of compounding. Picking the right SIP for investment is extremely important. Hence it is necessary to know the Do’s and Don’ts for selecting SIP.
Do’s Before Selecting A SIP Plan
The following are the things that you should be doing before selecting a fund for starting your SIPs:
#1 Define Your Goals
Before investing in mutual funds, you should define your financial goals, investment amount and time horizon. Moreover, it is essential that you consider the influence of inflation on the intended amount. Your investment horizon is also crucial for selecting the appropriate type of fund based on asset classes. Also, based on your goals, you should select a fund that best suits your investment needs.
#2 Analyze Your Risk Tolerance Levels
Risk tolerance is all about how much market volatility you are able to withstand with your investments. The significance of the investor’s financial objective can also be linked to the investor’s risk profile. Choose appropriate investments based on your risk tolerance levels and investment horizon. For example, if you are a high-risk taker with a long-term investment horizon, equity mutual funds may be a good pick for your needs. On the other hand, debt funds may be suitable if you have a low-risk tolerance level.
#3 Have A Long Term Investment Horizon
Mutual funds are market-linked instruments. Thus, invest in mutual funds with a long-term outlook. Since markets are volatile in the short term, having a long-term perspective will help you average out the volatility. Furthermore, due to the power of compounding, you might easily reach your long-term goals with small and disciplined investing.
#4 Analyze and Monitor Mutual Fund’s Performance
It is necessary to analyze and monitor a fund’s performance during different market cycles (ups and downs). The movement of the market and the external environment may have an effect on your investments. For instance, when interest rates are rising, you should avoid debt funds with longer maturity. This is because these investments carry a higher interest rate and, therefore, will not be profitable when the economy is expanding.
#5 Know The Fund’s Expense Ratio
When selecting a mutual fund to invest in, you should know the fund’s expense ratio and entry and exit loads, if any. These fees and charges often reduce the overall returns for the investors. Thus, it is advisable to check the fund’s expense ratio and compare it to its peers. Selecting a fund with a low expense ratio will help you realize more gains.
#6 Understand The Tax Implications
Before investing in mutual funds, you should be aware of the applicable taxes. Whether an investment is made in a lump payment or through SIPs. Knowing the tax implications will help you estimate potential returns from your investments.
#7 Use Online SIP Calculator to Estimate Potential Returns
Using a SIP calculator will help you estimate the potential returns from your SIP investments. The calculators are free, and estimate returns based on the historical performance of the fund. Furthermore, using the calculator will assist you in determining the monthly investment amount for the corpus you wish to build at the end of your investment tenure.
Don’ts Before Selecting A SIP Plan
Following are the things that you should not be doing before selecting a fund for starting your SIPs:
#1 Don’t Try to Time the Markets
Never try to time your entry or exit. It is almost impossible to predict the markets. Just inculcate the habit of regular investing, and you don’t have to worry about timing the markets. You should maintain SIPs regardless of market conditions.
#2 Don’t Select Funds Purely Based on Past Performance
Past performance doesn’t guarantee a future return. Only because the fund was able to generate good returns in the past couple of years doesn’t mean that it’ll continue to do so. Though they are a good indicator, you must not purely select a fund based on this. Analyze the performance across market conditions and pick a fund that has fared well.
#3 Don’t Invest in a Scheme Because Your Friend or Family Member is Investing
A scheme that suits your friends/ family doesn’t necessarily mean that it will suit your investment needs. You need to pick funds that suit your investment needs and goals. Thus, don’t go by suggestions and tips from friends and family. Perform your own analysis or hire an investment advisor.
#4 Don’t Panic When Markets are Volatile
The market is volatile, so market-linked investments do not guarantee returns. However, markets tend to recover after a fall. And, a bull phase isn’t permanent. Thus, when you know your investment horizon, make sure you are invested throughout. Don’t panic looking at the market movements.
#5 Don’t Discontinue/ Exit Your SIPs
Exiting or discontinuing your investments before realizing your goals is not the right approach. Investing for the long term and not stopping your SIPs midway will help you generate the desired returns.
#6 Don’t Invest in the Scheme Beyond Your Goal Duration
Always redeem your investments only after achieving your financial objective. Continuously investing in mutual funds for a period beyond your tenure may sometimes generate lesser returns if the markets decline during that period. Thus, always have your exit strategy in place.
#7 Don’t Invest Across Multiple Funds That Give You Exposure To Same Assets
Don’t invest in too many funds that will expose your holding to the same assets. Always aim for diversification. Invest across a scheme that will help you generate stable returns. Diversification gives you exposure to different assets, and when markets are volatile, your portfolio may not fluctuate too much.
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